The Paletz Law Blog

Recovering Debt After Tenancy: Navigating the Collection Process

We at Paletz Law take a collection attorney’s mentality when practicing landlord/tenant law. This provides our clients with a more comprehensive approach to dealing with renters during the entire tenancy process.

This starts at the application phase, where in order to enhance a landlord’s chance of recovery at the end of a tenancy, it is imperative to be proactive in the gathering of asset data at the beginning. Information such as a tenant’s place of employment, where they do their banking, and maintaining their contact details is vital. Additionally, if it is a residential tenancy, then obtaining a co-signor should be explored. Likewise, if it is a commercial tenancy, then having a personal guarantee can be important.

As the tenancy progresses, although we always encourage our clients to negotiate payment arrangements where applicable, it is highly advisable to not let bad debt linger for too long. Therefore, filing for eviction should be done immediately when these avenues have been exhausted.

Once at the eviction phase, the next question becomes whether to seek recovery of the premises only or to concurrently seek a money judgment in Michigan a/k/a second cause in Ohio. There are pros and cons – the pros being that if you are successful in obtaining the money judgment at this juncture, it is more readily actionable to begin post-judgment remedies such as wage or bank garnishments. However, the cons are that typically there is not only a higher cost, but also a higher procedural threshold to obtain a money judgment. This can cause a delay as well as the ability to account for physical damages to the rental unit has not ripened since possession has not yet been obtained. Also, from a collections processing perspective, if a money judgment is sought before recovery of possession, there are now potentially two claims – one in the amount of the money judgment, and another for the aforementioned physical damages. This can provide some logistical difficulty in accounting for all monies a property owner is legitimately owed and can be especially challenging when working with a third-party collection agency.

To that end, many of our clients ask whether they should use a collection agency or proceed straight to hiring a collection attorney. There is no one size fits all answer to this inquiry as it really depends on the size of the landlord’s portfolio and organization. If, for example, they are a multi-state REIT, the collection agency route is usually more effective due to the sheer volume of potential claims. If the portfolio or organization is smaller, proceeding straight to legal has its advantages if the landlord is willing to spend some upfront costs to enhance their rate of return.

Regardless of which route is chosen, it is advisable to have a central point of contact internally as well as to set up a loss mitigation department, if able, to manage this process. This will also aid in handling the security deposit in relation to any monies that are owed to ensure uniform enforcement as well as compliance with applicable state laws, given that those laws can be punitive against the landlord if not properly followed. Other best practice tips are setting a minimum dollar threshold to avoid throwing “good money after bad” and using standard forms to enhance placement of files in collection.

As with anything, you get out of it what you put into it. In other words, if there’s an expectation once you send off the file that there’s no need for follow up or follow through, then the rate of return is most likely going to be negatively impacted. Therefore, investing in time and infrastructure to follow up is key to collection success.

The Bottom Line: It is understandable that spending the time to pursue bad debt is usually on the lower end of priorities. Especially when you consider the day-to-day challenges of property management. However, over time this aged delinquency in the aggregate will continue to rise and inevitably will need to be dealt with. So, why not implement a plan, allocate the personnel, and proactively address it from the beginning.