Collection Agency

A collection agency or debt collector is an entity used by lenders to recover funds that are past due or accounts that are in default. The lending company itself may also have a division or subsidiary that acts as its collection agency. A collection agency is often hired after a company has made multiple attempts to collect its receivables.

A collection agency is usually contracted because it focuses on recovering debts that are past due. Debt collection can be outsourced to a third-party agency, or transferred to a debt collection department within the creditor's firm. Companies find it cheaper to have a collections agency recover unpaid debts than to chase the clients directly.

The clients consist of debtors whose loans have become delinquent. The process of a debt getting turned over to an agency works as follows: A borrower who is unable to settle his debts or fails to make the scheduled payments on a loan will have his delinquency reported to the credit bureau; not only will his credit history be hit hard, but his debt will be turned over to a collections agency within three to six months of default. Overdue payments on credit card balances, mortgages, phone bills, auto loan payments and utility payments are examples of delinquent bills that a collection agency may be tasked with recovering.

A collection agency has the tools needed to track down a debtor, whether s/he changes location or phone number. These agencies also carry out multiple strategies such as calling the debtor’s personal phone and work phone, and even showing up on the individual’s front door front every now and again, in a bid to get the debtor to pay his or her balance. Collection agents may also contact family, friends and neighbors of the borrower in order to confirm the contact information that they have on file for the individual, but they cannot disclose the reason for trying to reach the person. An agent may choose to mail late payment notices to the debtor also. Either way, collections agencies ensure that the debtor has their full attention.

If the individual budges and pays his debt, the creditor pays the debt collector a percentage of the funds or assets that the agency recovers. Depending on the contract agreement entered into with the original creditor, the debtor may have to pay the full debt at once or only a portion of the debt at a time. However, if the borrower still won't cover his overdue account, the collector can update the borrower’s credit report with a ‘collection’ status. Having this status on a credit report leads to a drop in the individual’s credit score. A low credit score will affect the person's chances of obtaining a loan in the long term, especially since an account under debt collection can remain on a credit report for seven years.

Third-party collection agencies are bound by the Fair Debt Collection Practices Act (FDCPA), but in-house collection departments of the creditor are not bound by this Act. A debt collector would be found in violation of the FDCPA if s/he proceeds to collect old debt that has been charged off as uncollectible. An account that is uncollectible is one that has no chance of being paid off due to the fact that the borrower filed for bankruptcy or cannot be located. Also, while a collections agency can attempt to collect a debt on which the statute of limitations has run out, suing or threatening to sue the borrower for such a debt is considered to be in violation of the FDCPA. The statute of limitations typically lasts between four to six years from the first day a borrower defaults on his or her payment. Furthermore, unless a collection agency has won a lawsuit against a debtor, it can't legally seize assets from a debtor or physically harm or threaten a debtor to make payment.

A collection agency can only call an individual between 8 a.m. and 9 p.m. It can only contact the debtor’s employer about overdue child support and alimony, federal student loans and taxes. Debt collectors cannot contact the individual at work if s/he has explicitly stated that his or her employer does not approve of such calls during work hours.

Finally, an individual has the right to issue a cease and desist letter to a debt collector who repeatedly contacts him or her within a short period of time, as the FDCPA regards this behavior as a form of harassment. If after receiving the cease and desist, the collections agency still continues harassing the individual, s/he can make a report to the Consumer Financial Protection Bureau (CFPB).

Note that a collection agency is not necessarily a debt buyer. A debt buyer is a financial institution that buys debt from a creditor for pennies to the dollar, that is at deep discounts. So a creditor with $50,000 in overdue debt from its debtors could sell this debt to a debt buyer for $20,000, or 40 cents to the dollar. In so doing, the creditor writes off a $30,000 loss from bad debt. The debt buyer proceeds to recover the entire $50,000 debt from the debtors. If it succeeds, it nets $30,000 in profit. While a collection agency would attempt to recover the debt for the lender or creditor for a commission, the debt buyer wants to buy the debt to make a profit. Debt buyers may also hire collection agencies on a contingency basis, however, the FDCPA rules do not apply to debt buyers.