What Is a Debt Collection Agency and How Do They Get Paid?

If you own a business and one of your clients still owes you money, you can hire a collection agency to help you get your money. In exchange for a small percentage of the bill, a collection agency will work with you to come up with a plan to get your money.

Here is all the information you need about debt collection agencies and how they could help your business.

What is a Collection Agency?

Debt collection agencies may be called in if a business hasn’t been able to collect a debt, usually after an invoice has been late for 90 days.

The lender or creditor pays a percentage of the bill to the debt collection agency in order to get back money owed on credit cards, medical bills, business bills, and utility bills, among other things.

What Is a Debt Collection Agency

A collection agency will use databases to find customers who haven’t paid their bills and get in touch with them to ask for payment on behalf of businesses.

Then, if necessary, the agency will contact your customers in writing, over the phone, or in-person to get the money you are owed.

Your point of contact at the collection agency will keep you up to date on the debt recovery process. This includes any attempts to get in touch with the customer and whether or not they were able to settle for a full payment or a partial payment.

When a customer doesn’t pay, a debt collection agency can even file a lawsuit to take the person to court and sue them for the money they owe.

How Does a Debt Collection Agency Make Money?

Most of the time, collection agencies get a commission of 25 to 50% of either the original invoice amount or the amount of money they get.

Commissions vary based on how old the debt is, what kind it is, how much it is worth, and how many times the account has been used.

Keep an eye on people who owe you money, because the longer a bill goes unpaid, the harder it is to get paid and the higher the collector’s commission rate.

Collectors also try to negotiate settlements with people whose debts are hard to get. Often, these settlements are for less than what was owed.

Depending on the agency, you might not have to pay anything for debt collection services unless the agency gets the money for you. In other situations, you may have to pay a certain amount whether or not the agency can get the money back.

What Collection Agencies Are Not Allowed to Do?

There are a number of laws that govern how debt collection services work. The Fair Debt Collection Practices Act (FDCPA) is a law that tells debt collection agencies what they can and can’t do. It also protects consumers from unfair debt collection practices.

What Is a Debt Collection Agency

In general, the FDCPA stops debt collectors from doing things that are harmful or annoying, such as the following:

  • Repeatedly calling the borrower, especially outside of 8 a.m. and 9 p.m. A debt collector can’t talk to the consumer between these times unless the court says otherwise.
  • Using a fake threat to sue the borrower. A collection agency can’t threaten to go to court if it doesn’t plan to or can’t do so.
  • Threatening to hurt or kill the person who borrowed the money. The FDCPA says that it is against the law to use or threaten violent physical harm against a consumer, their property, or their reputation. It is also against the law to call or talk to a consumer over and over again in order to annoy or abuse them.
  • Trying to collect a debt in an unfair way. Debt collectors can’t get interested, in fees, charges, or other costs that weren’t part of the original agreement unless the agreement says so. This also includes depositing or threatening to deposit a postdated check from the borrower with a date earlier than the date on the check.
  • Creating, putting together, and giving out a form that gives the wrong impression that the debt is being collected by another collection agency. The FDCPA says that it is illegal to trick a consumer into paying a debt.
  • Getting in touch with the borrower while knowing that the borrower is being represented by an attorney for their debt. A debt collector can’t talk to a consumer about their debt without going through an attorney first.

If a debt collection agency you’re thinking about does any of the above, you should probably look elsewhere for help.

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