Chasing payments: Collection agency or small claims court?

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When sending payment notices through e-mail, snail mail, and telephone calls don't work, a creditor has a few recourses left to recover what is due.

Collection agencies collect debt on behalf of the creditor in return for a commission, either through a flat fee or a percentage of the amount recovered. Some collection agencies function as debt buyers: They purchase delinquent or charged-off debt, typically in bulk from large firms, for a fraction of its face value. Most agencies have a “no collection, no fee” policy.

Collection agencies attempt to recover debt in a variety of ways. They do all of the legwork associated with contacting and dealing with debtors, from sending demand letters to making follow-up phone calls to the debtor's home. Some practice skip tracing in the event that a debtor leaves town in order to avoid collection action.

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Taking the case to small claims court is another way to seek payment for a debt. Small claims courts can resolve debt disputes of relatively small amounts of money. They have a maximum limit to the amount of monetary judgments that can be awarded. The limits vary greatly among states. For example, Arizona has a $3,500 cap, while the limit in North Dakota is $15,000. If the amount owed exceeds the limit, the court will not hear the case.

The process of suing in small claims court is typically straightforward, but it can be time-consuming. While most states require small claims cases to be heard within 60 days after filing, the defendant or debtor must be served with a summons before the case can proceed. This can prove difficult to achieve if the defendant has left town or otherwise cannot be found.

In addition, if the defendant or debtor does not live or work in the plaintiff or creditor's state, the small claims case must be filed in the state where he or she resides.

Collection agencies are often used by creditors when they wish to avoid the hassle of going through small claims court or if the cost of pursuing legal action exceeds the amount of debt owed. In some cases, creditors use collection agencies if the debt owed is more than the dollar limit of the small claims court in their state.

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Brennan and Clark is a member of the Commercial Collection Agencies of America. Subscribe to this blog to learn more about debt recovery.