The decision to send someone to collections is one that should be given serious consideration. Federal law governs how you and the collection agencies you hire can and cannot attempt to collect a debt.
In this guide, we explain the rules you should follow to keep your business out of hot water when pursuing unpaid debts, and we walk you through how to send someone to collections while complying with the law.
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To send someone to collections means to hire a collection agency to recover the person’s unpaid debt to you. If you’re trying to reach a nonpaying client or customer yourself through your usual communication channels, or you’ve sent a client several letters stating their account is past due, doesn’t mean that’s sending them to collections.
Debt collection is a massive industry totaling about $18.8 billion in the United States. In 2022, roughly 28 percent of Americans had at least one debt in collections. The most common types of debt incurred by U.S. households include credit card debt, student loans and medical debt. The average U.S. household has roughly $15,000 in credit card debt.
Nonfinancial institution businesses are now the creditors to an estimated $17.7 billion in debt nationwide ― and many times they will need to resort to debt collection to recoup that money.
Many experts recommend waiting 90 days after your invoice’s due date to send someone to collections. You can ask the nonpaying client to pay their debt once the due date arrives ― you can’t refer them to collections at that point. Instead, you can take several steps to try and get paid.
In the 90-day period spanning when an invoice is due and when you refer the client to collections, consider doing the following.
A professional, to-the-point phone call can remind the client of their debt and show them that you intend to collect your debt. During the call, use a friendly but firm tone, refrain from scolding the client and explain to them how they can pay their debt.
You can send debt collection letters to a nonpaying client either after you call them or you could skip straight to this step. Your first letter should have the same friendly yet firm tone you would use on the phone while reminding the client of their debts. Later letters can state your intention to send the client to collections or pursue legal action.
Sending a revised invoice with an added late fee ― or sometimes warning a client that you plan to send such an invoice ― can lead to payment. In this case, you won’t have to send the client to collections.
Sometimes, it’s best to end a dispute with a payout that, although smaller than the original debt, resolves the conflict. Given how expensive collections can be, a settlement might result in more money for you.
If the above steps haven’t resulted in payment, you can take your client to small claims court if the debt you’re owed is smaller than your state’s small claims maximum. You don’t need a lawyer to appear with you in small claims court and, if your client doesn’t appear, you win the case automatically. However, for smaller past-due accounts, small claims court may cost more in time and money than you’re likely to collect. If that’s the case, collections may be your best bet.
If the debt is too large for small claims court, you can hire a debt collection lawyer to bring your case to court. This step doesn’t precede the collection process ― instead, suing your nonpaying client replaces the collections process. However, opting for collections, rather than suing a customer, may be preferable, since ― although both options can be expensive ― collection agencies may cost less while saving you more time.
Sending a nonpaying client to collections ― or suing them ― should be the last resort. Before you take that final step, call the client, send them debt collection letters and take several other intermediate steps.
Whether you hire a collection agency or handle collections yourself, all debt collection processes must comply with the federal Fair Debt Collection Practices Act (FDCPA). Violating this law can make you and your collection agency appear untrustworthy and it can give your debtor a stronger argument if they decide to take you to court.
Make sure that neither you nor your collection agency does the following during the collections process.
Under the FDCPA, debt collection calls may not occur before 8 a.m. or after 9 p.m. in the debtor’s time zone. An exception, though, is if the debtor asks to schedule a call with you or your collection agency outside these times.
A debtor can request that you or the debt collection firm not contact them at their workplace. Under the FDCPA, you and your collection agency must comply with this request.
The FDCPA also states that neither you nor your collection agency can contact the debtor directly if the debtor has hired a lawyer. If this is the case, all communication should occur directly with the lawyer, who can then discuss debt collection matters with the debtor.
Under the FDCPA, you or the collection agency can only contact family or friends once and you can only do so to locate the debtor. At no point may you or your agency reveal that the debtor owes you money.
Collection agencies are required to send the debtor a validation notice within five days after first contacting a debtor. Before hiring a collection agency, verify with the agency that they are experienced in sending debt validation notices.
A collection agency cannot sue a debtor on your behalf, nor can it seize a debtor’s property or garnish their wages. It can indicate that an account is in collections on the debtor’s credit report, and they can regularly contact the debtor (except in the ways described above), but that’s all it can do. It’s up to you if you want to bring the case to court.
The FDCPA bans you or the collection agency representing you from making false claims verbally or in writing. You cannot label the debtor’s withheld payment as a crime or pretend to be a lawyer. Similarly, you cannot send false and misleading documents that give the appearance as though a court, lawyer or state or federal office is pursuing action against the debtor.
During the debt collections process, neither you nor the debt collection agency you’ve hired should inappropriately contact the debtor, threaten legal action or make false statements.
If you decide to send a client to collections, here are some tips to keep in mind when evaluating which collection agency you should hire:
When hiring a collection agency, ask about their specialties, certifications, qualifications, tactics, insurance, contracts and costs.
If you have a nonpaying account and ultimately decide to refer them to a debt collection agency or attorney, be sure to follow the letter of the law. It’s never a pleasant experience bringing a client through the debt collection process, but it’s critical your business receives payment for services rendered. Still, one false step and you could find yourself on the wrong end of legal liability, so always consult with legal counsel and leave the debt collection process to a reputable agency that won’t break the rules.
Tejas Vemparala also contributed to this article.