Collections

Posted on Posted in Debt

 

A collection agency is a business that pursues payments of 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.

 

There are many types of collection agencies. First-party agencies are oftentimes subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. Debt buyers purchase the debt at a percentage of its value, then attempt to collect it. Each country has its own rules and regulations regarding them.

 

First-party agencies

Some collection 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 may not be subject to legislation 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, first-party agencies try to collect debts for several months before passing it to a third-party agency or selling the debt and writing off most of its value.

 

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 contingent-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 takes a percentage of debts 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; very often this fee must be 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 age of the account and how many attempts have already been made to collect on it, the fee could range from 10% to 50% (though more typically the fee is 25% to 40%).

Some debt purchasers who purchase sizable portfolios will utilize a Master Servicer to assist in managing their portfolios (often ranging in thousands of files) across multiple collection agencies. Given the time-sensitive nature of these assets, many in the Accounts Receivable Management (ARM) industry believe there is a competitive advantage in utilizing this technique as it gives the debt purchaser more control and flexibility to maximize collections. Master Servicing fees may range from 4% to 6% of gross collections in addition to collection agency fees.

Some agencies offer a flat fee “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 many countries there is legislation to limit harassment and practices deemed unfair, for example limiting the hours during which the agency may telephone the debtor, prohibiting communication of the debt to a third party, prohibiting false, deceptive or misleading representations, and prohibiting threats, as distinct from notice of planned and not illegal steps. . In the United States, consumer third-party agencies are subject to the federal Fair Debt Collection Practices Act of 1977 (FDCPA), is administered by the Federal Trade Commission or FTC.

 

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 debtors, or misrepresent their rights and what may happen to the debtor.

 

Collection telephone 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 (in most other countries recipients of telephone calls are not charged, so this issue does not arise). The FDCPA also establishes what time of day calls can be made at, to whom and where. 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; typically this is done by an automated dialing system between the times of 8am and 9pm local standard time. Furthermore, a collection agent must stop all communication (including phone calls and letters) if the debtor sends a cease and desist order to the agency, either by letter or, in states such as Wisconsin which allow this, verbally. The collector may not use deceptive practices (for example, threatening the debtor with arrest or impersonating law enforcement). The collector cannot use obscene language and must inform the debtor of their name and the name of the collection company when requested.

Some companies are turning to agent-assisted automation. The use of automation ensures that the intended message is left, eliminating variations among different human callers and allowing rapid updates without needing to retrain them.

 

International debt collection is a less common and specialized field. Not many companies specialize in this sort of collection as there may be a need to speak different languages and have knowledge of the different legal systems and laws. International collection calls are often made in a different language than used in the collecting company.

Collection agencies are sometimes allowed to contact individuals other than the debtor, usually in an attempt to locate the debtor but without mentioning the debt. In the US under the FDCPA a collector is permitted to call a neighbor or relative for help in locating the person who owes a debt. Collectors may only ask for “address, home phone number, and place of work.” Collectors are “not permitted to discuss [the] debt with anyone other than [the debtor], [their] spouse, or [their] attorney.”  Collectors must state their name and must give the name of their employer if the person specifically asks. They may only 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, in which case the collector must cease all calls to the debtor’s workplace immediately.

At times a person with no connection to the debt or the debtor may be contacted by a collector by error. Examples include victims of identity theft and people erroneously targeted due to a similar name. Alternatively, the alleged debtor may dispute that the debt is payable. In such cases the alleged debtor can require that the collector or creditor prove that the debt is payable—in no jurisdiction does a debt exist merely because a collector says so. In the United States under the FDCPA, anyone has the right for any reason to request written validation of the debt or to demand the collector cease communication.

Relatives of deceased people do not themselves have to pay the debts of the deceased, but debts must be paid by the deceased person’s estate.

 

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 only original creditors.

 

Credit record

Defaulted debts may appear on a person’s credit record, and usually remain for several years, particularly if the debt has been referred to collection agencies or subject to court judgments. In the US this usually happens only when the account has reached Charge Off status from the original creditor. Not every account placed in collections is necessarily a “credit” account and subject to one of the three major credit bureaus reporting systems. If a debtor pays off a collection account, the item will be marked “Paid”, but not removed from credit reports. 

If a debt is disputed it can only appear as disputed on the alleged debtor’s credit report.

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