Generating new revenue with your property’s bad debt

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If you’re a landlord, you’ve carried post-eviction debt from an old tenant on your balance sheet. Even new operators just entering the industry have likely seen it—either at the time of acquisition or within a few months of managing their first property. Sure, you have possession of your unit and can lease it to a new resident, but you’re still hanging on to a loss that may be problematic for your investors, lenders, and your bottom line. So, what can you do about it? By now you probably realize your former tenant has little, if any, incentive to pay you as the symbiotic phase of your relationship has ended. As a result, your options are limited.

You might take some comfort knowing in the United States this is no rare occurrence—about 12 million Americans are at least 30 days behind on at least one non-mortgage debt payment. Of those debts, the average amount that needs to be paid in order to remain current is $2,258. No doubt this is a hard pill to swallow if you’re a community owner or operator, as that hope you’ll get paid for property damage or past due rent slowly dwindles.

Seeking recovery

It’s tempting to make the mistake of hiring a collection agency when you realize you can’t (or shouldn’t) collect those debts yourself. Roughly 77 million Americans have at least one debt “in collection,” with the average debt being a whopping $5,178. This makes the collection agency game a big and profitable industry in the U.S.—2020 revenue estimates for collection agencies stand about $13 billion. Certainly if you’re desperate and relying on the income stream from your accounts receivable, this might seem like your only option.

The reality, however, is with an industry whose average success rate anecdotally is under five percent, there is a better way—enter the debt collection law firm.

If you’ve worked with a collection agency before, you’ve probably been disappointed with the meager returns (if any). It’s easy to understand why collection agencies do such a poor job—they have no power to collect the money you’re owed; they can really only beg for payments. Think about it—you’ve already asked for the money politely. Maybe you’ve gone through the eviction process. At a minimum, you’ve probably called and you’ve definitely sent a security deposit notice and demand for payment. In reality, these are the only tools at a collection agency’s disposal.

Another approach

Conversely, a lawyer has an arsenal of tools at his or her disposal to effectively turn that debt into cash flow for your business. When even the first demand letter comes from a licensed attorney, it is clear you’re serious about getting paid. An attorney can file another lawsuit (apart from the eviction action) on your behalf; obtain a judgment; garnish wages, bank accounts, and in some states, income tax refunds; seize cars and other assets; lien real property; and compel a debtor’s appearance in court to satisfy a judgment.

While all that might you get you paid, collection agencies—surprisingly—avoid hiring an attorney at all costs. Why? Because in order to make you money they would have to give up half of their fee and front the costs of your litigation, eating away at their profits. What should be clear is why their recovery rates are so low, and why debt collection law firms traditionally are far more successful in pursuing the collection of client accounts receivable.

Avoiding pitfalls

But, it’s not just about the money. There are liabilities and legal issues of concern—often ignored by collection agencies. Debt collection is an extremely litigious field and it’s getting worse—not better. Countless local, state, and federal rules, laws, statutes, and codes make the collection of consumer debt an arduous task that can potentially expose even you, the creditor, to first party liability and the risk of penalties and lawsuits. Did you know with every new credit derogatory placed by a collection agency you have liability for its accuracy? Have you met many boiler room bill collectors intimately familiar with landlord regulations in every state where you operate a community? A debt collection law firm knows and understands the law and will utilize the necessary caution and diligence in representing you—often employing a compliance attorney and compliance team with explicit responsibilities related to these liabilities.

If you’re serious about collecting the money you’re owed, only a debt collection law firm can seriously and prudently represent your interests. Your community staff’s time is better spent marketing to new residents or working to keep your current residents happy (and paying on time, every month), but bad debt can be a real burden on the bottom line of your portfolio and jeopardize the financial health of your communities. Fortunately, with competent counsel, you can turn that debt into cash and a profitable new revenue stream for your business with little internal effort.

Recouping loss

While in the past you may have been told renters are “too transient,” and not worth chasing, the reality is the number of rental units in the U.S. only continues to grow exponentially. Renting has become the de facto, long-term choice for many Americans who may never explore owning a home. The myth that renters are “uncollectible” is only propagated by agencies who have little experience with the multifamily industry—or, more likely—little success. Why squander the opportunity to turn those line items on some spreadsheet into a new income stream as we enter a new fiscal quarter?


Author Ryan J. Fishman, Fishman Group, P.C.