A reoccurring situation that our agency, as well as other collection agencies face is the request to add-on or collect the collection fees charged to the client for the collection of the account. While tempting, adding interest, service fees and collection costs to a delinquent account could result in unwanted legal attention.
Section 808(1) of the FDCPA [15 U.S.C 1692f(1)] state that the collection of interest, service fees, collection cost or other expenses to the original debt is permitted when “such amount is expressly authorized by the agreement creating the debt or permitted by law” (emphasis added). The contract that creates the debt must specify what the interest rate, late fees, services fees, or other charges are going to be and must be signed by the consumer before a creditor can legally add them on to the debt. Be careful, just because you have a contract stating collection fees will be added, doesn’t always make them collectible. The fees being added must also be permitted by law. For example, if the consumer signs a contract stating they will be charged a $500 collection fee if the account is referred to collections, and the state law prohibits the collection of such fee from the consumer, it won’t matter what the contract says, the creditor will not be allowed to charge that fee.
South Dakota is one of the states that are silent on the issue of whether collection fees can be added to delinquent account provided it is detailed in the original contract. However, South Dakota does limit costs allowed in small claims court. Most collection accounts are sued through small claims. SDCL §15-39-73 states that the only items allowable as costs are the docket entry fee, mailing fees, witness fees and officer’s fees. Attorney fees are not allowed. Since a collection agency is essentially stepping into a position of an attorney by filing suit on behalf of their client, the collection fees become comparable to an attorney’s fees for providing the same type of service, and therefore, is not allowed in small claims. If a claim is brought through civil action, an attorney is usually retained and only upon the fact that the collection or attorney fees are outlined in the contract, then they may be allowable.
Our advice has always been to consult with your own legal counsel prior to adding collection fees or any other service fees to a delinquent account. While it may only seem fair to recoup the cost of collection from the consumer, a creditor may not be able to do so.