Collection Agencies for Deadbeat Clients?

What do you do if a client stiffs you?

Twice in my career, clients have decided not to pay my invoices. Once, after delivering a component, a client seems to have made the simple decision that the amount of my final invoice was less than what it would cost me to retrieve it (they miscalculated — the amount was so little I took them to small claims court. Sure, the opportunity cost was excessive, but it was such a bush-league maneuver I couldn’t let them get away with it.).

Currently, I’ve got a much more serious situation. I wish I had faith in the legal system, but I don’t. I feel that no matter how much the facts are on your side, the person with the deeper pockets can delay and delay, costing you not just money, but the only thing you have as a consultant, which is your time. As a software developer, you train yourself to manage risk, and the risk and opportunity cost of suing someone is clearly very high.

Jacob Profitt says that a collection agency is the logical choice: that they buy the debt discounted for the risk and I move on with my life. Has anyone used a collection agency to go after a contract debt? What kind of experiences have you had?

10 thoughts on “Collection Agencies for Deadbeat Clients?

  1. I agree with Craig; it seems like paying for a few hours of a laywer’s time would be a valuable investment at this point. Heck, even 30 minutes of consultation would likely be useful.

    Also, you mentioned that the client has deeper pockets and could win a drawn out ‘war of attrition’. Consider too that your former client’s time is valuable to them as well. After the year that most companies have had, they might be willing to settle quickly to free up their legal dept.’s time for more important problems.

  2. I have no experience using collection agencies for business debts either. I was humped hard by a client for a very significant amount of money just over 3 years ago and exhausted everything I could find or imagine to collect. My lawyer at the time (the same lawyer who argued against including contract cancellation clauses in my contract templates – ‘it just seems too negative’) requested triple his retainer to even investigate the matter. Multiple other firms agreed to accept my case if I could pay them what essentially amounted to everything I had already paid out.

    Efforts to negotiate directly with the client principles resulted in nothing much. Ultimately, I included my direct project expenses on monthly invoices and reported the delinquency to credit bureaus for about a year.

    I continued to provide maintenance and support services from previously contracted projects until the contracts expired. By the time I eventually considered more aggressive action (meaning collection agencies, toilet papering the shrubbery at the client’s offices, and leaving ignited paper bags full of dog droppings in the lobby) the company transferred assets in a ‘reorganization’ and eventually closed in bankruptcy.

    My suggestion is to take whatever you can get as early as possible through negotiation or by sale of the debt and move on. Adding or enhancing contract cancelation clauses might make it less costly should you encounter such circumstances in future is worth considering too.

    Best of luck in any case!

  3. My experience with the industry comes from having worked at Columbia Ultimate (http://ColumbiaUltimate.com/) many moons ago (that’d be mid 90s). They were at the time (and possible still are), the primary software provider for the collections vertical market. I’ve never used a collection agency myself, but this seems right up their alley. If nothing else, it beats both alternatives of simply letting it fall through and going after them myself.

    I wouldn’t sell an account to a collection agency until I knew I was finished with a client, though. Nothing says “and stay away” like a hand-off to a collection agency. I’d certainly send a letter or two that let them know you were headed that direction. Make sure you keep it professional. You aren’t making a threat, just letting them know your projected course of action.

    You’re at a bit of a disadvantage when approaching an agency because you won’t be sending them a lot of volume. On the other hand, accounts you send them will tend to be well-documented (you have all your contracts and invoices, right?), and pretty large (a summer’s worth of work isn’t going to be a small bill) so there’s a high effort/reward ratio for them. That means they probably aren’t going to turn you away, but you won’t get the best rates, either.

    Personally, I hope if you go this route that you’ll blog about your experience good or bad. I know that I let a thousand here or there slip by just because I didn’t have the time or focus to go after it. I don’t know why it never occurred to me to use an agency, but it just didn’t (and small claims doesn’t work well across state lines).

  4. Pingback: Collection Agencies for Deadbeat Clients? « From Big Island (FBI)

  5. You might look into the applicability of a mechanic’s lien. This is the same legal method that permits an auto-mechanic to keep your vehicle until you’ve paid for repairs and, after a certain legislated period of time, sell your vehicle to cover your debt. It is also used by sub-contractors to ensure they get paid when they work on your house. It is applicable in a variety of work-for-hire situations. Yours maybe one of them.

  6. May I suggest that you tell them about the self destruct code that you have in all your code that you always remove once you are paid. I always thought that this was akin to the mechanics lien. You don’t get the car out of the shop till it is paid for. I have heard of some in your situation who like to physically or virtually(by holding the appropriate high level passwords) have server control. Only upon payment is the server released….

  7. @Jason: I doubt that’d be applicable as your code isn’t a physical asset you can confiscate and re-sell.

    @BigBro: you miss an important legal consideration (that I didn’t know about until it hit a company I was working for). If your code can be considered “vital to the operation of” the company you are dealing with, you can be legally compelled to remove any disabling “features”–even if they haven’t paid you for it and knew in advance that the disabling mechanism was there. Getting the injunction involves lawyers, so most companies aren’t going to bother (even if they know they can), but bear it in mind.

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