There are different working methods with external law firms. It is important to examine carefully, case by case, the interests of the parties to prevent in advance damages to the debtors’ customers and the organization’s reputation as a result.
Financing of the legal expenses by the organization
In most cases, the legal expenses (skip tracing, deliveries, court fees, etc.) apply to the organization, and the lawyer’s office benefits from a fee, required at the notification stage or at advanced stages of the proceedings, which is decided to be paid by the client. In special cases, when the lawyer’s work is particularly complex or numerous, he will receive from the organization a fixed amount in advance or a rate determined from the collection amount.
Using the collected funds to finance legal expenses.
When the organization does not have available resources to finance legal expenses or the collections department does not have a dedicated budget to do so. Using the collected funds to finance further legal expenses can help the organization to achieve legal collections. The principle is simple: the organization dedicates a limited initial amount to finance expenses that allow a lawyer to carry out a certain number of collection procedures. Since the legal collection from debtor customers includes both a fund and reimbursement of the customers for collection expenses, dedicating the entire fund and expenses to finance expenses for the following procedures will allow the organization to open procedures for all customers, something that might not have been possible before.
For the collection manager, this is sometimes the only way to ‘prove the math’ to general management and get them to approve further investments in legal collections.
The main Achilles heel of this method is the settlements with the lawyers. Accounting becomes a burden, and it is very easy to lose control. Although the lawyers always guarantee that no accounting problem will arise, the problem generally worsens as the number of cases increases. To use this type of method, the organization must have available accounting resources to perform the settlements in a timely manner.
Financing expenses by a third party
In some countries, a lawyer is prohibited by law from financing the legal expenses of his clients. This is intended to protect lawyers from bankruptcy or insolvency as well as unnecessary pressure from their clients. For this reason, lawyers sometimes turn to third parties who finance the activity, usually for a certain percentage of the debt fund transferred to the lawyers’ care.
Read more: The Pros and Cons of Financing Legal Collections Expenses by a Third Party.
Selling debt before legal proceedings
Transferring the right on debtors’ files essentially enables the sale of the debt that the organization “holds” to another person, the buyer of the debt, who becomes the owner of the debt in whose hands are given all the rights to sue the debtor. Transactions of this type are usually carried out for bulk amounts since the buyer of the debt bears both the financing of the procedures and takes on the risk that, at the end of the process, the client will not repay his debt. The proportion of the part that will be paid to the organization is determined according to the weighted risk of the customer portfolio.
This method is essentially an immediate conversion of the debts into money while immediately recognizing the loss on the part that will not be returned upon collection. The main disadvantage is the loss of control over the legal procedures carried out by the buyer, with the possibility of damage to the organization’s reputation in cases where the buyer’s collection procedures become excessively aggressive and efficient.