Road to Recovery : U.S. Hires Specialized Law Firms to Help It Collect Unpaid Debts

Marty Brachfeld has a nose for money. Other people’s money. He is a partner in a Woodland Hills law firm that specializes in hunting down deadbeats and squeezing the cash out of them.

American Express, Security Pacific, Glenfed, Bullock’s, among others, have hired him to track down customers who haven’t paid their bills.

Resourcefulness is part of the job. There was the case of the jockey who was in debt to one of Brachfeld’s clients. One day the jockey had a good day at the race track, but one of Brachfeld’s process servers had a court order ready forcing the jockey to hand over the $2,500 first-place purse he had just won.

It’s all part of the quest to collect from what Brachfeld calls, “the risk portfolio.”

Now Brachfeld has another client, the federal government. Uncle Sam, you may have heard, has his own money troubles. The federal deficit is running at $150 billion, give or take a dollar, and to try and chop it down, last month the government selected four law firms in Los Angeles as part of a three-year pilot program to collect debts that individuals and companies owe the government. Other law firms in Brooklyn, Detroit, Miami and Houston were also selected.

First Use

It’s the first time the government has turned to private firms to collect outstanding debts. When Congress passed the Federal Debt Recovery Act of 1986, the U.S. attorney general’s office was empowered to hire private law firms to do some of the collecting. Three of the law firms are from the San Fernando Valley: Brachfeld and Sheppard; Goldsmith and Burns in Tarzana; and Hayt, Hayt and Landau in North Hollywood.

The outstanding debts are not overdue taxes--the IRS tends to that chore--but may include student loans, Small Business Administration disaster home loans, overpayments to defense contractors and military personnel, Housing and Urban Development home loans, as well as civil and criminal fines.

It can all add up. U.S. Atty. Robert Bonner said hundreds of millions of dollars in non-tax debts are owed the federal government in greater Los Angeles, and nationwide these debts are $32 billion.

It costs money to make money, of course, and to collect money. The Los Angeles-area law firms will be paid 15% to 24.5% of every dollar they collect. Brachfeld expects $6 million in uncollected government debts to be dumped on his desk.

Usually the U.S. attorney’s office is charged with collecting money owed various government agencies. Last year the Los Angeles office hauled in $44 million. But William Goldsmith, 35, whose law firm was also selected to help collect government debts, said many of the government’s cases have lower priority because the agencies are understaffed and busy “litigating violent crimes, drug deals, Ivan Boesky types.”

Goldsmith insists that collecting debts “is not a funny business.” Then he tells the story of a San Bernardino man who ran a nudist colony and wanted to pay off his debts in club memberships. Goldsmith held out for cash.

A Last Resort

Most of the time, Goldsmith and Brachfeld are contracted as a last resort. Brachfeld, 44, says his firm gets a commission of 15% to 45% per dollar it collects for commercial customers. No matter how skillful the sleuthing, they strike out more often than not. Brachfeld and his partner, Joan Sheppard, have four other attorneys working for them, and on average they collect 39% of the debts their clients hand over. At the moment, Brachfeld says, his firm is trying to chase down $24 million in debts.

Both Brachfeld and Goldsmith attended San Fernando Valley College of Law, and Goldsmith set up shop 10 years ago. One of his first clients was a collection agency, and things mushroomed. Goldsmith’s client list now includes Federal Express, GTE and Bankers Trust in New York. He and the other two lawyers at the firm spend a lot of time trying to collect delinquent student loans.

Student loan applications usually contain addresses of the student’s relatives, and that serves as a starting point. Once Goldsmith has tracked down the former student, his firm calls and sends a letter spelling out the details of how much money is owed in hopes of working out a payment schedule.

Goldsmith makes a distinction between his work and that of a collection agency.

A collection agency often relies on a stream of letters and a barrage of phone calls to shake loose the money, but in California it cannot take someone to court over a debt. Goldsmith, on the other hand, sends out only one letter. If there is no accommodation, Goldsmith heads for the courts to force the debtors to pay off.

Even with a court order in hand, it doesn’t mean the money will start flowing. “California is extremely consumer-oriented, and there’s a great deal of protection,” Goldsmith said. In California, if a homeowner files a homestead exemption, up to $30,000 of the home’s equity is protected against lawsuits; for married couples, the limit is $45,000.

There’s also a $1,200 one-time exemption on personal property. So if Goldsmith wins a court order against somebody who drives, say, a Toyota worth about $5,000 as a used car but with a $3,900 car loan on it, “we’re probably not going to touch” the car, Goldsmith said.

How Much Equity

Trying to figure out how much equity people have in their property is the key, and the lawyers regularly use motor vehicle and real estate title records as part of their research. “Finding a car with sufficient equity is unusual in California,” Brachfeld said. He should know. He owns three cars, including two Mercedes-Benzes, and each one has a loan.

One advantage of the new federal collection program, Brachfeld says, is the swifter court service. To attach someone’s salary or take control of a business or take possession of personal property to pay off a debt all require a court order. Debts under $25,000 have to be handled through Municipal Court, and Brachfeld says the wait to get into Los Angeles Municipal Court is 14 months. At Los Angeles Superior Court, the venue for cases involving more than $25,000, the wait is four years.

In the federal debt cases, Brachfeld figures he can walk out the door of U.S. District Court with a judgment order in just eight months.

After eight years of chasing down money, Brachfeld figures there are three kinds of people who don’t pay their bills. The first two: those who suffer hard times and maybe have lost their jobs, and those who “play the cash-flow management game and wait until the last minute before settling,” he said. In category three, he said, are “the hard-boiled deadbeats.”

Goldsmith tells the story of a record-store owner who hadn’t paid one of his suppliers. One day a marshal, a moving van and some movers arrived at the record store and started emptying it out in front of the owner. “He came up with a cashier’s check for $20,000 within an hour,” Goldsmith said.

Brachfeld’s biggest score involved an elusive Japanese company. He won a court judgment against its California operations, but they were just shell companies. Then Brachfeld was tipped off to a money transfer from Japan to make payroll for the company’s New York operation. So he hired a New York attorney and, on the appropriate day, $300,000 was transferred by wire from Japan to a New York bank, and a marshal served a court order and seized the $300,000.

Before getting into law, Brachfeld was an executive with a company in San Mateo that financed airplane and car leases. But he wanted to run his own business. After going to law school, he put out his shingle eight years ago, when the economy was sputtering. Since he wanted to get into debt litigation as a sideline, Brachfeld had to choose between “representing debtors in bankruptcy or creditors who had the money. I made the decision I had to eat too.”