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4 Critical Questions Commercial Collectors Should Be Asking

starzec michaelFrom a distance, commercial collections appear to be just another collection file, the way a Thoroughbred and a Clydesdale are both horses, just that one races and the other hauls Budweiser. However, that would be a mistake. Commercial and consumer debt are as different as a horse and a zebra.

Commercial files are attractive for a number of reasons. The balances are significantly higher promising larger returns. It is also a relief to know there are no FDCPA concerns. In addition, they can be a welcome change from template driven consumer litigation. That said, its unique nature requires an analysis to ensure it is the right fit for your firm. It is important to conduct an initial file review, just as you would for consumer debt. The difference is in the questions you need to ask.

What Kind of Business?

Your initial inquiry is to verify the corporate status of the potential defendant. Are they incorporated and in good standing with your secretary of state? Are they an LLC or a partnership? Or, are they using a business name but are really a sole proprietor? If the corporation is dissolved, that is not the end of your inquiry. They may continue to do business, only now without corporation protection. The date of dissolution and the date of your client’s contract will help dictate if you can sue and who to sue as well.

Any Disputes?

It is also crucial to require your potential client to disclose any disputes they received from the customer and how they were addressed. For example, in one case, we were asked to collect for breach of a sales contract for an electric forklift. Simple, right? Well, it turned out the buyer did not pay because our client sourced forklifts from overseas and the manufacturer used a charging cord incompatible with American outlets. As you can guess, we did not take that account.

Contingency Fee or No?

Before accepting the file, verify if a contingency fee arrangement is appropriate. This may seem strange, but a significant percentage of commercial work is pursuing unpaid insurance premiums. However, under insurance policies, the final amount owed is not determined until there is end-of-term audit. In many of these potential files, that audit never happened. As a result, there is no sum certain that is owed and the invoice is only an estimate. Hence, the proper litigation avenue is an action in equity for specific performance to force the audit, which is not properly recompensed by a contingency fee.

Finally, once you accept a file, send a demand letter. While not required as these are not consumer debts, this may result in settlements, returned mail that discloses new addresses, business closures or details about why the bill wasn’t paid – financial hardship or issues with your client’s performance that the seller might have forgotten to relate.

Does the Client Know?

Another aspect to consider in taking commercial work is legal sophistication. Your big bank clients know that at times they have to make business decisions to take less or nothing at all to avoid exposure or negative outcomes. In many commercial cases, even if you are receiving files from a forwarder, the actual plaintiff is a small business that has never engaged in litigation. They will be unaware of the processes, how much time a case may take and the risks associated with trial. They likely have an inflated idea of what litigation can do and often assume that because there is a contract, they are going to immediately prevail and/or that a judgment entry means they will receive immediate payment. Many take their cases personally, making them unable to make the business decisions often necessary in litigation. Therefore, take time to fully explain the limits of litigation, the risks involved and that a 50% settlement in hand is worth more than a 100% judgment on paper.

By the same token, ensure your retainers have provisions that address what happens in the event of counterclaims or other substantive litigation. A provision that allows you to opt out or have your client choose a different counsel in the event of substantial litigation is ideal. Moreover, even if there is no counterclaim, commercial litigation often involves demanding discovery, depositions and motion practice. As such, verify your staff has the legal bandwidth to handle these matters and the time to address them properly.

Commercial work can help diversify your client base and provide big hits if you recover settlements on these larger balances. However, understanding the internal logistics, client learning curves, the amount of litigation involved and the differing strategies that must be employed are critical to ensuring success.


Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.