Absent a written agreement to the contrary, Alec will probably be obligated to pay the agency something.

Most reputable agencies and law firms will return accounts to you on demand without requesting their fee or a share in any future fee paid to a new collection agency and without hourly charges for the time and effort used.

Nonetheless, when a volume of accounts is referred to either a law firm or a collection agency, it is recommended that you have a written agreement to cover the relationship. Here are some of the terms and conditions that should be included in such an agreement:

1. 1. 1. 1. The fees (and the reimbursement of costs or expenses to start suit) are usually set forth in a schedule to the agreement on the theory that they may be changed from time to time. The procedure for referral and documentation being referred should be included to indicate what materials you are furnishing to the agency or law firm and the lines of communication between the two parties.

            There should be a special clause that covers the requirement to hold monies in escrow in special trust accounts, specifying that the monies should not be commingled with the firm's own monies. You should reserve the right to inspect bank accounts and all records.

         2. The agreement should provide that the firm acts as an independent contractor and not as an agent or employee of the creditor. This is most essential; it ensures that you can allege in any litigation that the agency or law firm was not your agent but was acting in its own interest and under its own control. There should be a representation by the law firm or agency that they intend to diligently attempt to collect the accounts and will comply with all the federal, state, and local laws and specifically the Fair Debt Collection Practices Act.

             

         3. The procedure for remitting the monies to the client by a specific day each month should be included. The normal practice is to request that the law firm or agency remit the monies by the fifteenth of the month following the month in which the monies were collected. Provisions may be made in the agreement with regard to any checks that may be returned after that date.

             

         4. The circumstances under which either party can terminate the agreement should be clearly set forth in the agreement to cover the type of situation in our example. In most instances, the agreement would provide that the agency or law firm will return the accounts on demand at any time without any further compensation. The agency or law firm is entitled only to a fee or compensation on monies actually collected prior to the date of termination. Usually, agreements provide that the law firm or agency may retain accounts on payment plans.

             

         5. Indemnification by both parties is also an appropriate clause. You want to have indemnification in the event the law firm or collection agency fails to comply with any federal or state laws. At the same time, the agency or law firm will want to receive indemnification from you, primarily to provide that the information you furnish is accurate and correct. That protects them in the event they are sued because of this inaccurate information.

            You may or may not wish to set parameters for settlement or may specifically state that you must approve any settlement for less than the amount for which the account was referred, either in writing or at least verbally.

         6. Assurances by the agency that it is licensed to practice in the state in which it is conducting business is necessary, since licensing of out-of-state collection agencies is required in about two thirds of the states. Assurance by the law firm that a partner has been duly admitted to practice law before the state bar association in which the law firm is located should be included.

             

         7. The agreement should certainly specify any reports received from the agency or law firm, including how often and what is included. Do you expect reporting a monthly basis? Weekly? Quarterly? Also, the type of information that you want to see in reports would probably include at the very least the name, address, balance, and collection activity of the account. In the event the law firm institutes suit, they should be required to report the court in which suit has been started, the index number and whether a judgment has been entered, as well as the date and amount of the judgment. In some instances, you may want to seek copies of the judgment.

             

         8. You also should reserve the right to audit the agency or law firm at any time by visiting the premises and examining the files, the records, and the computer printouts as well as the trust accounts, the deposits, and a record of the payments that the law firm or collection agency received. It is recommended that this audit be done with or without notice. When dealing with a law firm, the procedures to institute legal suit, the fact that suit should not be instituted without approval of the creditor, the reimbursement of costs, the availability of witnesses for trial, and the general terms of settlement should be covered.

At the time of signing a contract, attorneys submit copies of their malpractice insurance, and collection agencies provide evidence of the bonding by the various states as well as copies of their errors and omissions policy.

Another thing to consider - depending on how you structure things - is whether you want your attorney or agency to file a proof of claim in all bankruptcies or only in those exceeding certain amounts. This may not be relevant if you do this yourself.

Agreements with law firms should cover the criteria under which a suit may be initiated, the payment of costs and disbursements, and the control over the conduct of the litigation. Usually, separate provisions allow the attorney to perform special services (such as appeals) at a specified hourly rate rather than on a contingency basis.

It is recommended that even if you are referring only a small number of accounts to an agency or law firm, you should prepare an agreement covering the above items. Consultation with counsel is recommended.