Businesses often transfer their accounts receivable to a professional Collection Agency which their own in-house staff is unable to collect. Collection Agencies are expert in recovering debt. Their well trained team of debt collectors are able to recover money from even those hard to collect accounts.
Their role in the financial ecosystem is extremely important. Without them a very high percentage of the outstanding debts will never get paid off, leading to heavy losses for businesses. Of course no Collection Agency will recover money from every account assigned, but they try really hard using proven techniques.
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Debt Collectors are broadly divided into three categories:
1. “Collection Agencies” – Agencies which act as a middlemen between the creditor and debtor using standard techniques. They attempt to collect the debt in full. Some agencies operate in one state only while others have a nationwide license.
2. “Debt Buyers” -Agencies which buy debt by paying pennies on the dollar and usually agree to settle the debt even if a lower payment is offered.
3. “Collection Lawyers“: Unlike Collection Agencies, they do not have a single collections approach for all accounts. They study each case, give a customized solution and quote a fee accordingly.
1. Collection Agencies.
| When a creditor approaches a collection agency, he is typically offered 3 types of collection services: Collection Letters, Collection Calls and Filing a Legal Suit.
a) Collection Letters (Fixed Fees Service- Accounts purchased in advance) – A collection agency sends 4-5 collection letters to a debtor and typically charges between $10 to $25 upfront per account for this service. Collection letters are sent every 10 days or so. They run a USPS skip tracing scrub on these accounts to ensure the letters are mailed on the latest address of the debtor. They also check if the agency/creditors are legally prohibited from collecting a debt. For example, when a debtor has been granted a bankruptcy protection or if he has deceased. During the Collection Letters service all amounts go directly to the creditor, collection agency keeps nothing other than the small flat fees they had charged earlier. You can also add the late fees to the amount due if your contract permits. Creditor must report all payments made by the debtor to the Collection Agency so that they can print the correct (lower) outstanding amount on the remaining letters. They will completely stop sending letters in case the amount has been Paid in Full. Collection Letters service is usually recommended for debts which are within 30-120 days past due date and gives far superior results than your own in-house collections. You may check our sample debt collection letters to get an idea what the debtor receives from a Collection Agency. b) Collection Calls (Contingency based, No Collection – No Fees) – This is where an actual human being (debt collector) picks up the phone and starts making phone calls to the debtor. This is a contingency based collections service and is usually recommended for debts older than 120 days or if Collection Letters service did not recover the debt. A Collection Agency would usually not accept an account for collections if the debt is older that 2 years. They also specify the minimum amount of debt that can be assigned for this service, usually $100 is the cutoff limit. With their extensive experience, debt collectors are able make a perfect collections call. They are able to handle debtor excuses way more professionally, patiently and smartly than your own employees. Most agencies hire multilingual staff to handle Spanish collections if required. The collection agency keeps 33% to 50% of the amount collected per your agreement, and passes the remaining money to you (the creditor). Do not always fall for those ultra low cost collection agencies, their recovery rates may be lower. Also, if a collection agency is near you do not hire them just because of that reason, in debt collections the location does not matter. Hiring a good collection agency is really important to get superior collection results. c) Filing a Legal Suit (Contingency based) – This is third type of collection service where a Debt Collection Agency’s attorney (or a partner attorney) sends legal notices to the debtor. The attorney may even try to collect amount against the assets of a debtor. This could be debtor’s bank accounts, brokerage account, garnishing wages and even against certain types of real estate that the debtor may own. Collection agency usually takes a cut of around 30%-50% for these kind of cases. These accounts should carry high value debts to justify the cost of hiring an attorney. Collection fee can be negotiated with the collection agency in case the outstanding amount is in thousands of dollars or if it is a B2B debt (commercial/business debt). In case of B2C debt (individual/consumer debt), there is usually no room for negotiation. The reason is that individual debts are harder to collect, and unlike B2B accounts the B2C debts are subjected to far more stringent collection laws. |
2. Debt Buyers:
| Debt Buyers purchase bad debt in bulk and pay a small money to the creditor for it, collection activity starts after the purchase. For example, if the outstanding debt on an account is $1000, a Debt Buyer may buy it for $50 only. Accounts are usually settled at a lower price point. For example using the above scenario: They will happily settle the account even if the debtor offers to to pay $200, for a nice $150 profit. The Debt Buyer keeps 100% the money recovered, and does not need to share anything with original creditors. |
3. Collection Lawyers:
| Collection activity is not always done by a collection agency, many lawyers are in this industry as well. They study each case, give a customized solution and quote a fee accordingly. In this case a debtor will receive a legal notice or a phone call from the lawyer’ office. If there is a co-signer on the debt, the collection activity can be made on the co-signer as well. |
Fair debt collection laws:
There are several “Consumer protection laws” and the “Fair Debt Collection Practice Laws” that all debt collectors are suppose to follow. Here is the list of all debt collection laws.
A debt collection agency should be respectful, law abiding and truthful. They should not discriminate people based upon gender, race, age etc. They should not contact you in odd hours, like late evenings or very early mornings. They cannot try to threat you by passing statements like “If you do not pay, the police will arrest you“.
If the collection agency determines that the debtor cannot pay the debt in full, they can settle an account for a slightly less payment if the creditor allows to do so. A debt collection agency may also allow the debt to be paid in monthly installments. Debts do have an expiry date, there are some statute of limitations beyond which a collection agency is not allowed to sue a debtor. For example many states U.S.A. have a rule that a debt older than 4 years cannot be collected upon. Other states have a 3 or a 10 year cut-off period.
Credit History Reporting
Non-payment of debt can be reported to credit bureaus ( Transunion, Experian and Equifax) by the collection agency if original creditor wishes to do so. This negative entry on debtor’s credit history report can be quite damaging because chances of getting new loan goes down significantly for many years. He may also face problem in changing jobs as many employers run credit checks on their prospective employees.
Importance of collection agencies
Due to the nature of their business, debt collection companies have a bad reputation. FTC gets highest number of complaints from this industry. But see the flip side, there are thousands of collection agencies in USA, giving employment to hundreds of thousands of individuals. They also help many other businesses to avoid going out of business due to unpaid bills, saving those jobs as well.
Do read our article about how to improve the cash flow for your business and minimizing accounts receivables. While you outsource all those problems in debt collection to a 3rd party collection agency, you can focus on more important things like expanding your business or serving your existing clients.
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