From Collector: Number Crunching

Can you add fees to delinquent debt? Look to client contracts and the courts for guidance.

5/28/2019 10:30 AM

NewsCollector Magazine
From Collector: Number Crunching

Many creditors want collectors to seek collection fees to offset a portion of their recoveries that agencies retain as payment for their services. The law allows for those fees, but only when certain requirements are met.

A collection agency can only charge a consumer a collection fee in one of two instances: when a written contract between the creditor and consumer expressly states the consumer is liable for collection fees, or when a statute or ordinance expressly permits creditors to charge collection fees, Dennis J. Barton III, managing attorney for the Barton Law Group LLC, reports in the May issue of Collector magazine.

Traditionally, an agency would attempt to collect these fees if the language of the underlying contract between the creditor and consumer allowed for “collection costs,” which was the common phrasing for such a fee. That language, however, is no longer enforceable and is a violation of the Fair Debt Collection Practices Act and many state consumer law statutes. The creditor can be liable under some of these state statutes by its own acts or vicariously liable for the actions of a collection agency if the creditor requested the fee to be collected.

When a collection fee arises from a contract, the language of the contract must be precise for the collection fee to be enforceable. In Kojetin v. C U Recovery, Inc., 212 F.3d 1318 (8th Cir. 2000), the most influential case on this issue, the court held collection fees are only enforceable when the contract uses the phrase “collection fees” rather than “collection costs.”

Collection fees are generally a percentage of the outstanding balance. For example, if the collection fee is 25% of a $1,000 debt, the collection fee is $250. In order to collect a percentage fee, the Kojetin opinion stated the contract must use the term “collection fees.”

In addition, the court explained the most enforceable contracts inform consumers the collection fee is a percentage of the amount owed and state the percentage. For example: “In the event a collection agency is hired to collect any outstanding amount, you agree to pay a collection fee in the amount of 33 1/3% of the outstanding balance.”

The Kojetin court explained that using the term “collection costs” implied to the least sophisticated consumer that they would only be responsible for the actual out-of-pocket expenses (i.e., costs) associated with the attempt to collect. That may include the cost of the letter, envelope and stamp to send the letter, plus the nominal wages paid to employees during the time they prepared and sent the letter.

Not only is the “cost” amount much less than the percentage amount, it creates an arduous duty on the part of the collector to itemize every expense associated with the collection effort. It also creates an undue burden on a collector if that amount is challenged, and it often is by skilled consumer attorneys. The work involved in determining the “cost” of collection efforts makes seeking that amount impractical.

Barton also reviews several other cases on collection fees, including Richard v. Oak Tree Group, Inc., 614 F.Supp.2d 814 (W.D. Mich. 2008), in which the court applied Kojetin to an agreement that used the phrase “collection fees” but did not explain the amount of the fee was a specific percentage of the outstanding balance. The letter also did not disclose to the consumer that the percentage would apply.

The bottom line is that creditors can use collection fees to offset some or all of the collection charges associated with the recovery of outstanding balances. The ability to legally collect these fees starts with the particular language in a statute, ordinance, or, most commonly, a contract between the creditor and the consumer. With some diligent focus on the phrasing of the collection fee provision, creditors and agencies can collect these fees while minimizing legal exposure.

Read the complete article on collection fees for more court case examples and insights from Barton.

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