When you approach a collection agency, you will be offered three types of services:
1. Collection Letters
2. Collection Calls
3. Legal suit
Selecting the right product is important, and it primarily depends on how old your debt is and how big is your average outstanding balance on unpaid accounts.
| Kindly allow me to go a little bit off-topic before we discuss the main subject. One thing is obvious if a debtor has not paid you within the first 30-60 days, then the likelihood that they will pay anymore is really low. These two-letter words “Collection Agency” have the same impact on debtors, like when you are driving, and you see a police car parked ahead. The moment you spot a cop, you suddenly check if you are wearing the seat belt, or if the speed of your car is within limits or for any other traffic violation. Similarly, a debtor knows that when his unpaid bill is being handled by a collection agency, he gets a lot more serious, the probability of getting paid suddenly increases. The debtor knows that a collection agency will employ several tactics to make him pay, may add a record on his credit history or even file a legal suit. |
Your strategy should be based on the number of days the debt has been past due.
| Softer Collection: Fixed Fees based | Intensive Collections: Contingency Based | ||
| Step 1 | Step 2 | Step 3 | Step 4 |
| Contacts made on your name ( Letters + Auto-Calls) | Contacts made on agency’s name ( Letters) | Debt collector contacts the debtor multiple times on the phone. (Personal Calls) | Legal Suit filed on the debtor |
| Submit after 30 days past due | Submit after 60-120 days past due | Submit after 120 days past due. | After Step 3 or balance is high |
First two steps are Flat Fees Services ( I really like flat fees services because they are so cost-efficient and the debtor pays you directly)
Step 1: Here, a collection agency sends five reminder notices under your business name ( there is no mention of a collection agency anywhere on it). Some agencies will combine two automated calls and 3 Letters instead of all five letters.
Step 2: Collection letters are sent under the collection agency’s own name, and that this notifies the debtor that this account has been transferred to a professional collections agency.
Next two steps are Contingency services (This becomes a necessity when the account is 120 days past due. No fee is charged unless the agency recovers money.)
Step 3: A human “debt collector” will call the debtor ( usually multiple times) and insists that the debt needs to be paid off.
Step 4: A legal suit against the debtor is filed. Less than 2% of the total cases qualify for legal action.
Check this >> Cost of hiring a collection agency
When should you submit an account for Step 1: (Pre-Collections)
Use this service when you do not have enough staff or time to continue to follow up with debtors who have not paid after the first billing cycle has passed. The account is not in collections yet, and all communication happens using your business name. This is also called pre-collections service and accounts are purchased in advance.
You should assign an account for “Step 1” immediately when an account is 30 days past due. A collection agency will do some very important verification/background checks which you will not do. The most important at this stage is “Change of Address or Phone“. Collection agencies have ways to know the debtor’s latest address or new phone number.
Additionally, the letters they send are professionally crafted, and their intensity increases with each letter. They cost only about $15 per account ( each account = 5 contacts made to the debtor). Imagine, even if a single debtor pays you $1000, you would have recovered your entire investment with the agency.
In most cases, a collection agency will be able to collect about 70% or more of all accounts assigned if accounts are assigned after 30-45 days. Your in-house staff cannot beat the cost, $15 for five contacts. That’s about $3 per contact made.
When should you submit an account for Step 2: ( Collection Letters)
At this step the account is in Collections, letters are sent out under Collection Agency’s own name. The cost is the same as “Step 1”, about $15 per account.
If an account has completed the previous “Step 1” and remains unpaid, instruct your collection agency to transfer those accounts automatically to “Step 2”.
If you are using “Step 2” directly then assign accounts which are 60 to 120 days past due. The collection agency will also do a “Bankruptcy Scrub” to validate if the debtor is protected by a court order, and no recovery attempts should be attempted.
Some agencies also perform “Litigious Scrub” to check if the debtor has a history of filing back a lawsuit; in that case, collection actions are not recommended.
In most cases, a collection agency will be able to collect about 50%-70% of all accounts assigned in “Step 2” if the debt is assigned in 60-120 days.
When should you submit an account for Step 3: (Collection Calls)
When a debt is over 120 days past due ( and in some cases 180 days past due in certain states) or the account has completed “Step 2”. There is no upfront cost; you do not need to buy any accounts.
Per your agreement, a collection agency will keep between 35-50% of the amount collected and remit you the remaining money. But really, by this time this amount is nearly “Impossible to collect” or ready to be “Written-off”.
It is recommended is sign a “Settled in Full” agreement with your collection agency. It means if the debtor is not in a position to pay 100% of the amount owed, but can make a payment of say 80% right away, give authority to your agency to waive off that 20% balance. There is no point in risking the entire amount if 80% can be collected immediately.
When should you submit an account for Step 4: (Legal Suit)
After previous steps are completed, a collection agency will suggest you if a legal suit is advisable or not. This depends on many parameters, including, age of the debt, how big the debt is and a few other factors which are beyond the scope of this article.
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