Collection agency

Collection Agency

A collection agency is a business that pursues payments on debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Some agencies, sometimes referred to as "debt buyers", purchase debts from creditors for a fraction of the value of the debt and pursue the debtor for the full balance. Creditors typically send debts to a collection agency in order to remove them from their accounts receivable records; the difference between the amount collected and the full value of the debt is then written off as a loss.^{[citation needed]}

In many countries, collection agencies are governed by laws that prohibit certain abusive practices. Failure to adhere to such laws may result in lawsuits or government regulatory actions.

First Party Agencies

Some agencies are departments or subsidiaries of the company that owns the original debt. First party agencies typically get involved earlier in the debt collection process and have a greater incentive to try to maintain a constructive customer relationship. Because they are a part of the original creditor, first party agencies are not subject to some of the laws which govern collection agencies ^{[citation needed]}.

These agencies are called "first party" because they are part of the first party to the contract (i.e. the creditor). The second party is the consumer (or debtor).

Typically, most creditors will retain accounts with first party agencies for a period of around 6 months before the debt is written off and passed to a Third Party Agency (See Below).

Third Party Agencies

The term collection agency is usually applied to third-party agencies, called such because they were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications. This however is dependent on the individual service level agreement (SLA) that exists between the creditor and the collection agency. The agency will then take a percentage of the debt that is successfully collected; sometimes known in the industry as the "Pot Fee" or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance and very often this fee is paid by the creditor if they cancel collection efforts before the debt is collected. The collection agency makes money only if money is collected from the debtor (often known as a "No Collection - No Fee" basis). Depending on the type of debt the fee ranges from 10% to 50% (though more typically the fee is 15% to 35%).

Some agencies offer a flat fee, typically $10.00, "pre-collection" or "soft collection" service. The service sends a series of increasingly urgent letters, usually ten days apart, instructing debtors to pay the amount owed directly to the creditor or risk a collection action and negative credit report. Depending on the terms of the SLA, these accounts may revert to "hard collection" status at the agency's regular rates if the debtor does not respond.

In the United States, consumer third-party agencies are subject to the Fair Debt Collection Practices Act of 1977 (FDCPA). This federal law is administered by the Federal Trade Commission or FTC. This act limits the hours during which the agency may call the consumer. It also prohibits false, deceptive or misleading representations, and prohibits the agency from making threats of actions the agency cannot lawfully or does not intend to take.

In the United Kingdom although no similar law exists, all third party collection agencies must hold a consumer credit license under the Consumer Credit Act 1974 in order to carry out their business. Licenses are issued and regulated by the Office of Fair Trading a government body which protects consumers from unscrupulous traders. In order to retain their license third party agencies must work within the framework outlined within the 2003 fair debt collection guidance.

Sale of Debts

Another option for creditors is to sell their debts to the fast growing debt buying industry. This allows the creditor to generate immediate revenue from their accounts receivables, save infrastructure costs associated with managing collection agencies, and avoid the possible legal liability and public relations risks associated with debt collection. This practice has developed principally in the USA but now the debt purchase market is burgeoning in the UK, Europe and Asia.

Debtors

The person who owes the bill or debt is called the debtor. People may become debtors because of a lack of financial planning or over commitment on their part, or due to an unforeseen and uncontrollable event that disrupted their life. Examples include the loss of a well paying job, an accident that leaves them unable to work, or a sudden and serious illness. Americans for Fairness in Lending and other non-profits can help debtors know what their rights are.

In commercial collection cases, the debtor is a business. This includes sole proprietors, corporations, partnerships or individuals that incurred the debt for business purposes.

Collection Practices

The modern business model is the primary reason for the many complaints brought against collection agencies ^{[citation needed]}. Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt, often to the point that they sound threatening to the debtors. Most people are accustomed to being treated with a certain amount of customer service and often complain that they do not receive that treatment from debt collectors.