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.
An increasing number of 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, or even include "interest" in the balance owed. 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.
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. Collection practices in the United States are generally, but not always, governed by the Fair Debt Collection Practices Act. Violating the FDCPA or any other state or federal laws can result in the levying of large fines against the collection agency, sometimes even criminal proceedings in extreme cases. Debtors can even file suit against collection agencies for violations and be awarded monetary damages.
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 the Fair Debt Collection Practices Act which governs third party collection agencies.
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.
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 debtor and prohibits communication of the debt to a third party. 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 third party collection agencies that pursue debts regulated by the Consumer Credit Act must themselves hold a Consumer Credit Licence; this is a requirement under the Consumer Credit Act 1974. 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 licence 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 overcommitment 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
Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt, often to the point that they are threatening or abusive to the debtors. Most people are accustomed to being treated with a certain amount of customer service and courtesy and often complain that they do not receive reasonable treatment from debt collectors. Topical websites that expose this behavior are increasingly popular and consumer rights attorneys work to inform consumers of their rights under the FDCPA.
Collection calls
Collection calls inform debtors of their obligations and motivate repayment. In the US, the FDCPA prohibits calls to the debtor if the call will cost the debtor toll charges or air time charges. If a person answers, the call center may track statistics (e.g., the times and days when someone answers) in order to place calls at times when the debtor is more likely to be home. Furthermore, a collection agent must stop calling a debtor by telephone and proceed only via mail if the debtor sends a cease and desist letter to the agency. The collector also is prohibited from using deceptive practices (for example, threatening the debtor with arrest, impersonating law enforcement, or tricking the debtor into making a payment). The collector cannot use obscene language and must inform the debtor of their name and the name of the collection company when requested.
Successful collection calls also rely on the skill and understanding of the collector making the call. Quite often a collector only has the first initial phone call to establish a rapport with the debtor and to help work out a solution to the debt owed. This may take the form of a payment plan or a discount on the principal amount that is owed.
In international debt collection cases the collection calls are often made in a foreign language. This is useful if the debtor's knowledge of English is limited and it is quite often this lack of English that is used as a debtor excuse for non-payment.
Collection agencies sometimes contact individuals other than the debtor and this is allowed only with important limitations. Under the FDCPA, a collector is permitted to call a neighbor or relative for help in locating the person who owes a debt as long as there is no communication about the debt. Collectors must state their name and must give the name of their employer if the person specifically asks. A collector may contact each person once, unless it is believed that the person gave the collector incorrect or incomplete information at the time, but now has complete or updated information.
Collectors may contact a debtor at the workplace unless the collector has been informed the employer prohibits such calls. When informed of this, the collector must cease all calls to ther debtors workplace immediately.
At times a person with no connection to the debt or the debtor may be contacted by a collector in error. Examples include victims of identity theft, people erroneously targeted due to a similar name, or people who otherwise dispute the validity of the debt. In the United States under the FDCPA, anyone has the right for any reason to request, in writing, validation of the debt or to demand the collector cease communication. The collector must cease calling and supply, in writing, verification of the debt, or else they are in violation of the FDCPA.
Relatives of deceased people are usually under no obligation to pay off the debts of the deceased with their own funds, but the deceased person's estate can be used to pay off such debts.
Collection account
Collection account is the term used to describe a person's loan or debt which has been submitted to a collection agency through a creditor. The term is not used on debts with onl
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