Collection agencies help creditors or big companies in pursuing the debtors to pay their obligations. These middlemen are trained with tactics and strategies. They are very convincing in their jobs.
Collection agencies are businesses that pursue the payment of debts owned by businesses or individuals. Some agencies operate as credit agents and collect debts for a percentage or fee of the owed amount. Other collection agencies are often called “debt buyers” for they purchase the debts from the creditors for just a fraction of the debt value and chase the debtor for the full payment of the balance.
Typically, the creditors send the debts to an agency in order to remove them from the records of accounts receivables. The difference between the full value and the amount collected is written as a loss.
There are strict laws that prohibit the use of abusive practices governing various collection agencies in the world. If ever an agency has failed to abide by the laws are subject to government regulatory actions and lawsuits.
Types of Collection Agencies
First Party Collection Agencies
Most of the collection agencies are subsidiaries or departments of a corporation that owns the original arrears. The role of the first party agencies is to be involved in the earlier collection of debt processes thus having a bigger incentive to maintain their constructive client relationship.
These agencies are not within the Fair Debt Collection Practices Act regulation for this regulation is only for third part agencies. They are instead called “first party” since they are one of the members of the first party contract like the creditor. Meanwhile, the client or debtor is considered as the second party.
Generally, creditors will maintain accounts of the first party collection agencies for not more than 6 months before the arrears will be disregarded and passed to another agency, which will then be called the “third party.”
Third Party Collection Agencies
Third party collection agencies are not part of the original contract. The contract only involves the creditor and the client or debtor. Actually, the term “collection agency” is applied to the third party collection agencies. The creditor regularly assigns the accounts directly to an agency on a so-called “contingency basis.” It will not cost anything to the merchant or creditor during the first few months except for the communication fees.
However, this is dependent on the SLA or the Individual Service Level Agreement that exists between the collection agency and the creditor. After that, the collection agency will get a certain percentage of the arrears successfully collected, often called as “Potential Fee or Pot Fee” upon every successful collection.
The potential fee does not have to be slashed upon the payment of the full balance. The creditor to a collection agency often pays it when the deal is cancelled even before the arrears are collected. Collection agencies only profit from the transaction if they are successful in collecting the money from the client or debtor. The policy is also called “No Collection, No Fee.”
The collection agency fee ranges from 15 to 50 percent depending on the kind of debt. Some agencies tender a 10 US dollar flat rate for the soft collection or pre-collection service. This kind of service sends urgent letters, usually not more than ten days apart and instructing debtors that they have to pay for the amount that they owe unswervingly to the creditor or face a negative credit report and a collection action. This sending of urgent letters is by far the most effective way to get the debtor pay for his or her arrears.