Collection agency

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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. [1] Some agencies, sometimes referred to as "debt buyers", also purchase debts from creditors for a fraction of the value of the debt and pursue the debtor for the full balance.[2] 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.[citation needed]

Debt collection agencies have a reputation for engaging in threatening behavior, harassment or coercion.[citation needed] However, 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.

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[edit] 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.[3] Because they are a part of the original creditor, first party agencies are not subject to some of the laws which govern collection agencies[citation needed].

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).

[edit] 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 initially costs nothing to the creditor or merchant except for the cost of communications. The collection agency makes money only if money is collected from the debtor (often known as a "No Collection - No Fee" basis). The agency will take a percentage of the amount collected as its fee, which can range from 10% to 50% depending on the type of debt (though more typically the fee is 15% to 35%).[3]

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.

[edit] 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.[3] This practice has developed principally in the USA but now the debt purchase market is burgeoning in the UK, Europe and Asia.

[edit] Debtors

The person who owes the bill or debt is called the debtor. People may become debtors because of a lack of financial planning on their part or careless overcommitment. Other people become debtors because of 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.

In commercial collection cases, the debtor is a business. This includes sole proprietors, corporations, partnerships or individuals that incurred the debt for business purposes.

Finally, others are treated as "debtors" by a collection agency even though they dispute that they owe the debt. People in this category 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, such people can use the procedures found in the Federal Fair Debt Collection Practices Act, including the right to request validation of the debt.

[edit] Collection Practices

The modern business model is the primary reason for the many complaints brought against collection agencies[citation needed]. Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt, often to the point that they sound threatening to the debtors. Most people are accustomed to being treated with a certain amount of customer service and often complain that they do not receive that treatment from debt collectors.

Many debt collectors find their jobs to be stressful. Their base salary is often low, requiring them to bring in enough money to earn commission. [4]

[edit] Collection calls

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Collection calls rely on repetition to motivate the debtor to pay. In the US, a call center may call the debtor's home up to three times daily, as prescribed by federal law. Most states also have rules limiting how debts may be collected. For example, in most cases California law does not allow call centers to place 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.

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.

[edit] 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.[1] The term is not used on debts with only original creditors.

The collection account normally appears on the credit report of a person (debtor) who has had one or more accounts referred to collection agencies, within the last seven years. [2] The name of the collection agency, and the amount of money a person owe, will be listed in the report. Also, in some cases, the agency's contact information is listed.[3] If a debtor pays off a collection account, the item will not be removed from the credit reports - it will simply be marked "Paid." [4]

[edit] Legal remedies in the United States

Most collection agencies in the United States hire outside collection lawyers. These collection attorneys frequently have considerable experience in debt collection lawsuits.

First, the lawsuit is filed with the court. Then, the debtor must be notified of the lawsuit by having the court documents served upon him or her, usually in person. The person presenting the documents to the debtor is usually a process server and usually works for a separate process service company, to avoid allegations that service was not done correctly. Depending on local laws, process may also be served by a local Sheriff’s Deputy.

Once the debtor is served, he or she must take some action to respond to the lawsuit, though the specific type of response depends on individual state law. If there is no response, the collection attorney will usually request that the court grant a default. A default judgment is one that rules in favour of the collection attorney because the debtor did not respond to the legal notice. Default judgment is almost always granted if the debtor does not respond to the lawsuit.

Once the collection agency's attorney has obtained judgment, he is empowered to take action to obtain the money from the debtor. A number of options are open, depending on the state the debtor is in and the status of the debtor's employment and assets.

Typically, the most effective method to collect on a legal judgment is to garnish a debtor's wages. The court will send or serve an order of garnishment to the employer. This requires the employer to deduct a certain percentage of the debtor's paycheck and forward it to the court, which in turn forwards the money to the collection attorney. Under Federal law, the amount of the garnishment cannot exceed 25% of disposable earnings or the amount of earnings exceed 30 times the minimum wage (15 U.S.C. § 1673). Some states have additional restrictions on garnishment as well. However, depending on the state in which the debtor resides, those who are earning less than $20,000.00 per year generally cannot be garnished by third-party collectors. Also, debtors who are already being garnished, especially in cases of child support, cannot have additional wages garnished.

A creditor who has obtained a judgment can also execute against a debtor's assets, such as automobiles, bank accounts, and real estate. Every state has specific restrictions and procedures regarding how and what may be executed against. These are often called "execution exemptions." When an asset (other than money) is executed against, it is usually sold, in many cases by a public official such as a sheriff. The proceeds, minus fees, are then given to the judgment creditor. Any excess proceeds are to be returned to the judgment debtor. Judgment creditors may also place liens on certain bonds the debtor may have with the government, such as the bond that contractors are required to have when operating a construction company.

Specific laws and procedures can vary considerably from state to state. Most states have Statute of Limitations laws that limit the length of time from the commencement of delinquency in which a collection agency can file suit.

[edit] Regulation of collection agencies

[edit] United States

Regulation of collection agencies occurs primarily at the individual state level as most states require collection agencies be licensed and/or bonded. In addition, many states have laws regulating debt collection, which agencies must adhere to (see Fair debt collection).

The Fair Debt Collection Practices Act is the primary United State Federal law governing debt collection practices. The FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that violates the Act. Alternately, the Federal Trade Commission or the state Attorney-General may take action against a noncompliant collection agency, including issuing fines, ordering damages, restricting its operations or even closing it down (see, e.g. CAMCO). [5]

The FDCPA specifies that if a state law is more restrictive than the federal law, the state law will supersede the federal portion of the act. Thus, the more restrictive state laws will apply to any agency that is located in that state or makes calls to debtors inside such a state.

[edit] Canada

In Canada regulation is provided by the province or territory in which they operate. The law is typically called the Collection Agencies Act and usually affords a government ministry power to make regulations as needed.[6] However, the regulations typically limit the agency to three contacts with the debtor per 7 day period. Further, a debtor should not be contacted unless they have been notified in writing first that the debt has been assigned to the agency making the contact.[7] Most debts in Ontario, Canada are subject to a limitation period of two years. After the second anniversary of the last formal intention to pay the debt, the collection agency nor anyone else has authority to collect it.[8]

For further information, see the Ontario regulations section on prohibited practices.

[edit] See also

[edit] References

  1. ^ English, Dale (2001-12-10). "Sector specialization important when choosing collection agency (How to Hire a Collection Agency)". The Business Review (Albany, NY) 28 (36): S5(1). 
  2. ^ Palmeri, Christopher (2005-11-14). "Debt Collection Puts On a Suit". BusinessWeek (3959): 86. 
  3. ^ a b c Legrady, Paul (2005-09). "Creditors Exercising Options For Receivables Management". Business Credit 107 (8): 62-63. 
  4. ^ Salary.com, viewed March 15, 2006.
  5. ^ Selected Commission FCRA Actions. Retrieved on May 9, 2006.
  6. ^ Collection Agencies Act of Ontario. Retrieved on December 7, 2006.
  7. ^ Information on collection agencies. Retrieved on December 7, 2006.
  8. ^ Limitations Act of Ontario. Retrieved on December 7, 2006.

[edit] External links

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