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The following article was published in our article directory on September 11, 2012.
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Is Your HOA Acting as a Debt Associatin?

Article Category: Advice

Author Name: Charles H. Maness, MSACC

Almost all associations will have to perform collections at some point. How the association chooses to perform collections can have a profound effect on future legal implications. How does your association handle collections? There are usually four methods that an association may choose when performing collections:

Internal collections by the Board are normally performed by self-controled associations. Often, a Board Officer will handle the communication and collection efforts on behalf of the association.
Management company can perform association approved and contracted, designated, collection tasks before referral to a debt collection agency or law firm, e.g. phone call, letter, threat to sue letter.
Referral to a debt collection agency.
Referral to a law firm.
With internal collections, the association is acting as a debt collection firm. When the association chooses to perform this type of collections they place the association at direct legal risk for any violations of the Fair Debt Collection Practice Act (Act). Unless the assigned association's agent is knowledgable of the rules and regulations of the Act, the association could be responsible for each violation.

Even a simple matter of issuing a notice of deficiency can invoke required notice to the debtor under the Act. The association should give the debtor a written, reasonable, and clear time period for the debtor to dispute any errors with the debt. Further, a notice of delinquency should reference that the letter is from a debt collector and any information may be used for that purpose. Without proper notice, the association could be barred from using information obtained in the collection effort. Finally, a threat-to-sue letter contains a legal liability on the association and the action is not recommended to be performed by the association without legal counsel.

If the association has a professional management company that provides collections internally, the association board should ask for a copy of their collection policy. The management company is a direct agent of the association and as such, the association may have liability for their actions. Due diligence by the Board of Directors to ensure that the management company is competent to carry out collections on behalf of the association is imperative. The management contract should contain a liability clause protecting the association for any violations of the Act.

Referrals of collections out to a debt collection agency or law firm is common in the industry. The risks of violations, costs of training, and compliance to the Act are not usually tasks that the association or management company are willing or competent to assume.

Debt management companies costs are based on a fee structure or percentage collection contract. The contracts usually contains liability for the association to make sure that the statements are correct and that the association has the right to collect the debt. Reverse protections against violations of the Act are also provided for the association protection.

The costs are typically significant for the association. The fee structure is usually per letter, per call, packaged amounts or the percentage contract option can range from a low of 25% to a high of 75% of the amount collected. Considerations for pricing includes the age of the debt, the type of debt, the status of the debtor's assets and employment. Although the costs are higher than internal or management collections, the risks for violations with fines, penalties, and suits are also less.

Law firm collections can be a hybrid of a debt collection agency and attorney legal actions. Most companies use law firms to issue threat-to-sue letters and to actually file lawsuits against the past due owners. Out of all the options for collections, the law firm offers the most protections as the attorney is representing the association and shelters most of the liability; however, the costs are the most substantial for the association. The association should give considerable thought on the rewards vs. the costs of using a law firm.

The recommendation for most associations is to craft a well-defined collection policy that uses a hybrid risk model to offers the most protections for the association at the most cost-effective methods. The hybrid risk model drafted and used correctly should have clear methods in determining the risk and reward of each action.

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