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Collection Law

( Originally Published 1918 )

The collection manager need not be a lawyer, but he should have a good knowledge of collection law. This is not to enable him to do the work of an attorney, but merely to qualify him properly for his own work. It will be readily understood that a knowledge of the legal conditions affecting collections—what he may do, and what he may not do, and the general possibilities both before and after suit is of the greatest value to the collection manager. In fact, he cannot be first-class in his work without a fair knowledge of collection law.

No complete presentation of the subject is possible within the limits of the present chapter. All that can be done is to give a few of the more important facts and features of the law which apply in collection work just enough to indicate the lines along which the collection manager should pursue his own studies.

Collecting by Legal Proceedings

Collection by legal proceedings is the last resort of the collection manager. It is usually expensive, always troublesome, and invariably alienates the customer. It is a confession of inability to collect the account in any other way. The collection manager can never build a reputation on collections made through the court-room. In some cases, however, collection by legal process is unavoidable. Then it should be employed without hesitation, and, once decided upon, should be pushed as vigorously and effectively as possible.

While collection by legal proceedings is not to be employed until it is clearly apparent that collection can be made in no other way, the fact that suit can be brought is one of the most effective collection measures at the command of the collection manager. The ordinary per-son has but slight knowledge of the law. He knows it is costly and troublesome, mysterious as to its workings, and frequently inexplicable as to its results. So greatly does he dread it that with many debtors the mere threat of a lawsuit, properly made, is enough to bring about a settlement.

Employment of Attorneys

When collection by suit is necessary, an attorney must be employed. In fact, in a great many cases attorneys may be employed to advantage before suit is necessary or even contemplated. A letter from an attorney to a debtor, stating that the account is in his hands, and suggesting that it would be advantageous for the debtor to call, will often be sufficient to bring him to the attorney's office; and, once there, some settlement without recourse to the courts should be possible. This is due to the general fear of a lawsuit already referred to. The attorney's letter convinces the debtor that suit will be brought unless the matter is settled. Indeed, in many cases the recipient of such a letter thinks that suit has actually been brought and that this letter is the first step, and comports himself accordingly.

Attorneys' Fees

When an attorney is to be employed it is always well to have a distinct understanding as to his charges before he is engaged. If the attorney is obtained from some agency list, the fees are usually fixed and understood, and, if for any reason a different fee is proper and allowable, the attorney will advise his client before proceeding. Ten per cent is the usual charge on small accounts collected without suit, this fee decreasing as the amount involved increases. On small accounts there is usually some minimum fee below which the attorney will not go, as, for instance, $3 or $5. Where suit is necessary, attorneys frequently receive one-half of the amount collected, the attorney then usually paying the court costs. The attorney's fee will, of course, be larger where collection is made by suit than where the matter is settled without recourse to the courts.

The following representative table of collection rates and rules are those which obtain for the United States among the attorneys of a well-known "mercantile service" :


NOTE.—These rates do not apply to collections outside of the United States and Canada. Special agreement and rates must be made with foreign correspondents when placing claims.

1.—First Class—Claims collected on first notice or demand:
5% on first $200 or less.
2% on excess of $200 to $500.
1% on excess of $500.
Minimum fee, $2.

2.—Second Class—Claims collected by repeated duns, notices or demands:
10% on first $200 or less.
5% on excess of $200 to $1,000.
2 1/2% on excess of $1,000.
Minimum fee, $3.
On claims of $6 or less, the fee shall not exceed one-half the claim.

3.—Third Class—Claims collected by suit:
10% of the amount recovered.
Minimum fee, $5.

4.—Suit must not be brought, or costs or any expense which would be chargeable to client incurred, without authority. Costs and disbursements must be advanced by clients before suit is brought. Should the nature of the suit justify an extra charge, client must be notified and the charge agreed upon in advance.

5.—Where by law or bar rules, a different rate from the above is obligatory on the attorney, prompt notice must be given clients or for-warders, and the privilege accorded of accepting terms or withdrawing the claim.

6.-Worthless claims to be returned without charge, unless suit has been ordered or some service rendered other than the ordinary investigation and efforts to collect.

7.—Subscribers sending business to one another will be governed by the above rules, except that fees must be divided, one-third to party sending and two-thirds to party receiving same.

8.-Where a claim has been sent to an attorney and any services have been rendered, and it is afterward settled by the claimant or party sending it, it shall be subject to the same fees as if collected by such attorney.

9.—Where client wishes judgment for future collection, or where security is obtained by attorney, fees shall be as agreed upon between the parties.

10.—Claims collected in instalments bear the same rate of fees as if collected all at once, in the absence of any agreement with client to the contrary.

11.—Subscribers sending claims to attorneys make such attorneys their own agents.

12.—Any attorney receiving business from subscribers which he is not at liberty to attend to by reason of being employed on the other side, or for other good reasons, will return same at once. If not willing to comply with these rules and terms, he will return business at once to subscriber.


Selection of Collection Attorneys

Some attorneys specialize on collections, and are for this reason better equipped to give proper and systematic attention to the accounts placed in their hands. The younger attorneys are frequently better for collection purposes than those of greater experience and reputation. The younger men need the money and have a name to make, and for this reason will follow a collection much more closely than is usual with the older men.

Whoever the attorney employed may be, he should be a good one and an honest one, and he must receive an adequate fee for his services. A dishonest or unscrupulous lawyer cannot be trusted with a collection. Such a man will sometimes make but little effort to win his case when it is brought before a justice of the peace or in some other lower court, preferring that it should be lost here for the sake of the prolonged litigation and larger fees involved in an appeal to a higher court. Where there is any suspicion that this may be done, the attorney should be informed in advance that there will be no appeal. Then, for the sake of his fee—if not of his reputation—he will do his best in the one hearing which is permitted him.

In choosing an attorney every care should be exercised to avoid friends of the debtor. To this end, when employing an attorney for out-of-town claims, it is some-times wise to select one who, while easily accessible to the place of residence of the debtor, lives himself in a different place. It is obvious that a friend of the debtor would not be likely to prosecute the claim as promptly and forcefully as a stranger would.

It has already been suggested that collection information of much value can frequently be secured from attorneys. When an attorney furnishes such information —and especially when he supplies it without charge—he should, as a matter of course, be given the collection work in his locality. It is certain that the attorney who furnishes reports without charge is conferring a material favor on the collection manager and the house, and is entitled to any of their business which he can handle, whether it be collections or other legal work. It may be noted in passing that many attorneys contend that collections do not pay for the handling, and justify attention only because they lead to other business which is profit-able. Be this as it may, the local attorney is one of the manager's best allies; and, being on the ground, and knowing the conditions and the law which controls, he can give valuable information that would be difficult for the manager to secure in any other way. Such attorneys are therefore well entitled to anything the collection manager can throw their way.

Placing the Account in the Attorney's Hands

When an account is placed in the hands of an attorney, he must be given a full and accurate statement of the case. At the same time any instructions necessary should be given him so clearly and specifically that there is no possibility of mistake. If suit is to be delayed, or not to be brought at all, or if a compromise will be accepted, or if there is any other information that may help the attorney, all should be plainly stated. Thereafter, any information in point which comes to the collection manager should at once be sent to the attorney. He cannot act to advantage unless he knows the facts, and all the facts.

In the interchange of information in regard to an account, both collection manager and attorney should guard against misunderstandings, as mistakes might be costly. Also, it should be borne in mind that the relation-ship between the attorney and the collection department is one of confidence, and, to be effective, there must be perfect co-operation and fair dealing on both sides.

Follow-Ups for Attorneys

Many attorneys fail to appreciate the importance of keeping the collection manager informed as to what is being done with his claims. For this reason he not infrequently supposes that the particular accounts in which he is interested are receiving no attention, when in fact the attorney may be carefully following them.

Attorneys are not, as a rule, good men of ordinary business; and, when they do not report promptly, they should be written to and a stamped envelope be enclosed for reply. Frequently the attorney's report will be re-turned on the back of the letter which was written him. Of course, an attorney cannot be expected to give a lengthy, detailed report of a small account, or even of a large account, unless there is some necessity for so doing. In a few words, however, he can tell enough to show that the account is being given the proper amount of attention.

If the attorney does not respond promptly, follow-up letters should be sent to him, as suggested in Chapter XII; and, if these fail to produce a response, the matter should be placed for investigation in the hands of some other attorney, with a statement of the facts. Or, if an attorney is employed who is recommended for collection purposes by one of the mercantile agencies, the matter can be taken up with the agency. Attorneys connected with the mercantile or collection agencies are usually bonded, and in such case there is no likelihood of loss through dishonesty.

Bringing Suit

Where a man has property in his own name subject to execution, the collection of an undisputed account by suit is a simple matter. Even where a debtor has no property, or where his property is exempt from execution, it is frequently advisable to bring suit. In some cases the debtor will pay up to avoid having a judgment standing against him. In other cases he may be ignorant of the law and afraid of it, and, if he finds out that suit has really been brought against him, will make some settlement.

When suit is begun, it is sometimes wise to have it continued from time to time so as to tire the debtor out or keep him in a nervous state until he will at last make payment for the sake of peace. The plaintiff may, of course, discontinue such a suit at any time if he does not think it worth carrying further, without loss save for the actual cost of the proceedings to the point of discontinuance.

All cases in the same locality should be brought be-fore the same judge or justice of the peace, as far as possible. This results in more friendly treatment and smaller court costs than would otherwise be the case.

Statute of Limitations

In every state of the Union is found the "statute of limitations," prescribing a period beyond which a debt cannot be collected by legal procedure. If action is not brought upon the account within this period, it is outlawed—unless kept in good standing by a payment or other recognition on the part of the debtor—and is not recognized by the courts. The prescribed time varies in the different states, and also varies with the nature of the claim. An open account expires by limitation in from two to eight years, according to the state. For notes, the period is usually longer. As a general rule the statute begins to run from the date of the last payment, if the account is fully due at that time. A written recognition of the claim by the debtor before the expiration of the statutory time limit gives it a new lease of life, the statute running from the time of such recognition.

It is obvious that the collection manager must watch his accounts closely and revive the account in some way, or bring suit before the expiration of the specified period, or he will be barred from legal procedure. Even a small payment, if made within the time limit, will give the debt new life, or, as above stated, a written acknowledgment of the debt by the debtor, stating his expectation of paying it, will serve the same purpose.


The exemption laws of the various states allow debtors to retain certain property regardless of what they owe. This is usually necessary property, such as a certain portion of the wages of an employee, the tools of a carpenter or mason, the homestead of a married man.

Speaking generally, no matter what the conditions, this exempt property is not liable for the debts of its owner, whether in the form of a judgment or otherwise. The exact character and the amount of property which is so exempt varies in the different states.


With instalment houses a frequent means of regaining possession of goods is by a replevin suit. This is a suit for recovery, and immediate possession is possible because the title of the goods is in the seller, and he is therefore allowed, by giving bond, to take the goods at once and hold them until the case comes up for trial. Many debtors, when goods are thus taken, do not make any further effort to retain or regain them, and the house has possession. If the case comes to trial, the seller can show that the debtor violated the terms of his contract by failing to make payments as they fell due. This will, in most states, defeat the debtor, but the law varies so greatly in the different states that this is not always true.

Garnishment : Attachment

Garnishment is a proceeding whereby the creditor stops payment of a debtor's salary or wage, this salary or wage being turned over in whole or in part, according to the circumstances, for the benefit of the creditor. A portion of the employee's salary is usually exempt from garnishment, the proportion varying in the different states. The proceeding, where possible, is very effective in forcing a debtor to settle.

Attachment is a means of preventing a debtor from removing his property from the state, or disposing of it within the state, after suit has been instituted against him for recovery of the debt. Attachments are usually allowed at the time suit is brought, if there is any reason-able ground for believing that the debtor contemplates leaving the state or disposing of his property. In many states, if the debtor attempts to abscond, he loses his right of exemption.

Judgment : Execution

When a claim is sued upon and decided in favor of the creditor, the award of the court is termed a "judgment," and fixes the amount to be paid by the debtor. A judgment can be kept alive more easily and for a longer time than can an open account. Under proper proceedings, property subject to execution and belonging to the debtor may be seized to satisfy a judgment at any time during its life.

An execution is issued by the court after judgment against a debtor has been secured. It is an order directing the proper court official to seize the property of the debtor and sell it to satisfy the judgment. Even though the property of the debtor may be exempt, the process is frequently effectual in bringing about a settlement. If an officer calls on the debtor with the execution, it usually has the effect of frightening him, regardless of the legal possibilities, so that he will make some settlement or give security if he cannot make payment at the time.

Supplementary Proceedings

Supplementary proceedings are well described in the following quotation: "Upon the return of an execution, unsatisfied in whole or in part, the judgment creditor may procure an order from the District Court, requiring the judgment debtor to appear before the judge, or a referee, and answer an oath, touching his property. The debtor may be restrained, by order, from interfering with or disposing of his property, not exempt from execution, during the proceedings. If there is any danger of the debtor leaving the state he may be arrested upon a warrant issued by the judge, on proof of the facts.

"Witnesses may be required to appear and testify in the proceedings. A receiver may be appointed with power to take property of the debtor, convert it into money and apply the proceeds on the judgment.

"Disobedience to orders made in these proceedings is punishable as contempt. The debtor cannot be excused from answering questions in the examination on the ground that such answers would convict him of the commission of a fraud."

Not infrequently debtors are summoned to appear in supplementary proceedings after a judgment has been rendered against them, and, not realizing the gravity of the proceedings, fail to put in an appearance. In such case they are in contempt of court, and an officer is sent to seize them and throw them into jail. The debtor is then in a very difficult and unpleasant position, and either he or his friends will almost always raise the money to pay the debt, if it is in any way possible, in order to secure his discharge.

Imprisonment for Debt

Speaking generally, imprisonment for debt is a thing of the past. It is not favored by the law; and almost the only grounds which are now recognized as sufficient for a debtor's imprisonment are fraud, or a belief that the debtor is about to leave the state. This position shows the changes that are constantly taking place in the law and the general progress of civilization.

Suggestions for the Collection Manager

When selling on contracts of conditional sale, the law of the particular state in which the sale is made must be consulted as to the force and form of such a contract, and the method of filing or recording; and these requirements must be followed to the letter. This is also true when selling under chattel mortgage. If the proper pre-cautions are not taken, the whole aim and purpose of the procedure, i. e., to hold the property as security for the debt, is thwarted.

When selling to a corporation, it should always be remembered that the stockholders are rarely liable for the corporate debts. If their stock is not full-paid, they are liable for such debts up to the balance unpaid on their stock; but, if the stockholder has once paid for his stock, or if he has bought it from someone else in good faith as "full-paid" stock, he can no longer be held for the debts of the corporation. This rule obtains in practically every state of the Union. In a partnership, on the other hand, each member is liable for any debts contracted by the firm up to the full amount of his personal property. The firm property must, of course, be exhausted before the personal property is levied upon, but the individual property of the partners, as well as the firm property, stands behind the partnership debts.

The time for filing a claim against the estate of a deceased person varies in different states; and for this reason, if the collection manager has such a claim, he should either file it at once or consult the statutes as to the time in which it may be filed.

Books of account, to be competent as evidence, must be books of original entry. This means that the entries must be made direct and not be copied from other books or memoranda. If entries are first made on a slip and then copied from this slip to the books, the books them-selves are not books of original entry and cannot be used as evidence. If such slips have been used and then thrown away, there are no books of original entry; and the de-tails of any transactions involved must be proved by personal evidence or in such other way as may be possible.

Journals and day-books are usually books of original entry. Ledgers, if their postings are taken from other books, are not. The collection manager should be careful that his books are kept in such shape that they are avail-able for court purposes when necessary.

If a check or draft taken in payment of an account is drawn on a bank or party in the same city in which the payee has his office, it must be deposited or presented for payment on the day it is received, or, at the latest, the day following. If it is drawn on a bank in another city, it must be deposited for collection within the same period. If this is not done, the payee is negligent, and if the bank or party on whom the instrument is drawn fails before the check or draft comes in, the loss falls on him.

Frequently it is possible for a debtor, if the pressure is severe, to secure some friend or relative to guarantee payment of his debt. In such case the collection manager must bear in mind that the guarantee is absolutely value-less unless it is in writing.

Law for the Collection Manager

The collection manager should study the bankruptcy law carefully, as delinquent debtors are very apt to go into bankruptcy; and he must then know what to do in order to secure proper consideration for his claims. When the amount is large, he will usually employ an attorney to represent him, but for small accounts he should be able to make the proper affidavits and file his claim himself.

The subject of contracts is of continuing importance to the collection manager. Nearly every business dealing is founded on a written or oral contract, and the collection manager must have a fair knowledge, at least, of the law of contracts if he is to handle his work intelligently. Any of the better works on commercial law treat the subject of contracts in considerable detail.

The law of negotiable instruments should also be given close study. Originally founded on the Law Merchant, i, e., the custom of merchants which had come into general use and had been accepted by the courts, the law of negotiable instruments is now statute law in most of the states, and is uniform in its main details in the majority of them. The statute is an important one for the collection manager, as the instruments he deals in most frequently, such as checks, drafts and notes, must be correctly worded and properly drawn to make them negotiable; and the requirements as to endorsements and as to presenting and protesting must be followed to the letter, in order to hold the various endorsers and insure payment.

The collection manager will also find a general study of commercial law—sufficient to give him the ordinary everyday requirements of business procedure from the legal standpoint—very helpful in his work.

Suggestions to Delinquent Debtors

In writing letters and sending statements to delinquent debtors, it is not uncommon to print short, pertinent statements at the top or bottom of the sheet. These are of such a nature as to cause the debtor to think, and not in-frequently to act. When used with discretion, and only where they are needed, they are advantageous. Some of these endorsements are as follows :

"It is common law, existing in every state, that any person or persons receiving any article or articles and making use of same are liable for payment."

"No responsible man will allow, and a poor man cannot afford, to have judgments and costs rendered against him. The proper time to make defense or settle an account is before the case gets into court. When once judgment is entered, defenses are barred."

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