When they are 120 days past due, David files suit in small claims (conciliation) court for all accounts that are over $1,000 but under $5,000. When he filed his first two or three cases, David paid his attorney on an hourly basis for advice on how to prepare for and handle the case. David now feels comfortable with handling small claims cases himself. He has been successful in getting judgments from several deadbeat customers.

David turns over all accounts that are 120 days past due and have balances of more than $5,000 to his attorney. David's attorney takes the cases on a "contingent fee" basis, which means that the attorney keeps a certain percentage (35%) of the amount he or she collects as a fee.

SCENARIO TWO:

Morton Co. is a wholesaler of plumbing products. Morton has thousands of customers. Morton Co. is large enough that it has its own credit and collections departments.

The credit department is responsible for deciding which of its customers will receive credit terms, and which of its customers must pay in cash. The credit department requires that each customer requesting credit terms complete a credit application and provide company financial statements and credit references. A decision whether to grant or deny credit to a customer is based on specific criteria in Morton Co.'s written credit policy.

The collection department is responsible for collecting past due accounts. Past due notices are sent on a periodic basis to all accounts. Telephone calls are made on a regular basis to accounts over $1,000. Morton writes off all accounts that are over 120 days past due.

When they are 120 days past due, Morton sells accounts with balances over $1,000 but under $20,000 to a collection agency. The collection agency pays Morton fifty cents on the dollar for the accounts.

When accounts over $20,000 are 120 days past due, Morton pays its attorney on an hourly basis to collect them. Sometimes, its attorney collects the account simply by writing a demand letter. Other times, its attorney must go through the process of commencing a lawsuit and obtaining a judgment against the customer. Morton's attorney also help's Morton collect on any judgments obtained.