Collecting Across State Boarders

We frequently get asked about trying to collect from a debtor, both consumer and commercial, who reside in another state. What makes this such a challenge and almost impossible at times?  Let me explain what can make going after your debtors so difficult:

First, know that every state has their own version of debt collection laws, and in many cases they require their own state licensing.  That may not sound like a big deal, but there are states that require a representative from your company to physically go to that state and pass an examination on those states laws before you can get a license (Nevada, Colorado, Tennessee for example).  Many of these states will also require you to have a physical presence in that state with a building, and your trust account there before you can contact a debtor in that state.  And a couple more states even have laws that make credit reporting a “communication”, so you cannot even credit report (Utah, Colorado).

Many states have their own regulators as well, so a violation like sending a collection letter or making a call into one of these states can bring a hefty fine.  Southern was licensed in Nevada for several years, but the amount of money we collected compared to the regulations (physically going there to take the exam, annual audits we have to pay for, annual fees for both the agency and the rep taking the exam costs over $1500 annually) was not cost-effective.

Secondly, each state has different laws on what you can do to collect.  Most states prohibit collection agencies from appearing in small claims courts (California, Arizona) so we would have to hire an attorney to take a debtor to court.  If there is no contract for attorney fees, those costs would usually not be recoverable. For a “simple” case in California, costs exceed $1000 per case.  There are several states that do not allow wage garnishments (Texas, South Carolina, Pennsylvania) so even if you find the debtor and they are working and earning good money, you cannot collect from them.  A few states have limited garnishment laws, like Massachusetts, where you cannot garnish state employees.

Third; can you find the debtor?  Even in today’s tech-world, debtors can stay ahead of the creditors and avoid communications and collection efforts fairly easily.  In most cases, a collector will not be able to use an automated calling device (ADAD) to place a call to a consumer’s cell phone without prior consent, so we are left with hiring people to dial the phone ($500 fine under the TCPA for each violation).  With the population growingly becoming cell-phone only households, federal law along with state laws continue to restrict creditors abilities to communicate with their consumers.

Fourth: the cost of going to court if you locate the debtor and believe there are attachable assets.  In some states, the wait to get to court can be close to two years (we had a case in Philadelphia that was put on the docket for that span of time).  If the debtor requests a trial, then the creditor will be forced to travel at their own expense to the site of the hearing or risk losing the case and giving up their debt.  If you are able to get a judgment in Oregon, it still needs to be domesticated into the state of the debtor’s assets to have any chance of success, which again requires locating the debtor and getting them served with papers.

Fifth: finding collection partners in other states willing to take on your debt is increasingly difficult and usually requires fees of 35% and up.  We have been somewhat fortunate in that my work with our national trade association has allowed me to meet many other owners across the country, and we have been able to forge partnerships that allow us to share some of these accounts that could be collectible.  But most of the time, other agencies do not want the potential risk and headache of taking on another company’s work, and when they do they want a much higher fee than is usually agreed upon at the outset.  And try to find a decent collection lawyer willing to handle one or two cases!

That is not the entire list of challenges facing a creditor trying to collect from their debtor in another state, but it is a start as you consider what might be involved with this type of debt.

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