Debt collection

Debt collection is the process of pursing payments of debts owed by individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector.[1] Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.[2]

There are many types of collection agencies. First-party agencies are often 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.

History

Debt collection has been around as long as there has been debt and goes back to the ancient civilisations, starting in Sumer in 3000 BC. In these civilisations if a debt was owed that could not be paid back, the debtor and his wife, children or servants were forced into "debt slavery", until the creditor recouped losses via their physical labour. In some societies debts would be carried over into subsequent generations and debt slavery would continue. However some early societies provided for periodic debt forgiveness such as a jubilees or would set a time limit on a debt.[3]

The Abrahamic religions discouraged lending and prohibited creditors from collecting interest on debts owed. By the Middle Ages, laws came into being to deal specifically with debtors. If creditors were unable to collect a debt they could take the debtor to court and obtain a judgement against him. This resulted in either the bailiff of the court going to the house of debtor and collecting goods in lieu of the debt, or the debtor being remitted to debtor’s prison until his family could pay off the debt or until the creditor forgave it.

Development of debt collecting agencies

House in Salinas, California, under foreclosure, following the popping of the U.S. real estate bubble.

Once debtors prisons were done away with during the early 1800's, creditors had no solid recourse against delinquent debtors. If there was collateral involved in the debt, such as with a mortgage, the creditor could take the property in order to indemnify themselves.

However, for unsecured debt, there is no way for the creditor to collect on his investment if the debtor had no money. Even if he receives a judgment against the debtor in court, everything hinges on the debtor being able to pay the judgment. If there were goods, the court could order these to be seized but the only thing a lender could do was to try and extend credit only to those who stand a good chance of paying it back.

In the United States during the savings and loan crisis of the 1980s, there was a huge resurgence of foreclosures and written-off accounts, similar although on a much smaller scale, than that of the Great Depression. Some financial innovators decided that there may be some profit in buying up delinquent accounts and attempting to collect a small portion of the amount due. They purchased these accounts from the original lenders at pennies on the dollar, and turned profit by collecting a fraction of what was owed by the debtor.

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.[4] Because they are a part of the original creditor, first-party agencies may not be subject to legislation that 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

A collection agency is a third-party agency, called such because such agencies were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-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%).[4]

Some debt purchasers who purchase sizable portfolios use 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 (FTC).

In the United Kingdom third-party collection agencies that pursue debts regulated by the Consumer Credit Act must be approved and regulated by the Financial Conduct Authority.[5]

Sale of debts

An increasing number of collection agencies, sometimes referred to as "debt buyers", purchase debts from creditors for a percentage of the value of the debt and pursue the debtor for the full balance, sometimes plus "interest". This prevents a debtor from merely defaulting or forgetting a debt. It also generates immediate revenue, albeit much reduced, for the creditor and reduces the public relations risks involved with defaulted debt collection.[6]

Some states have specific laws regarding debt buying. For example, Massachusetts requires companies that buy debt to be licensed whereas California does not.[7]

Debtors

The person who owes the bill or debt is the debtor. Debtors may fail to pay (default) for various reasons: because of a lack of financial planning or overcommitment on their part; due to an unforeseen eventuality such as the loss of a job or health problems; dispute or disagreement over the debt or what is being billed for; or dishonesty on the part of either the creditor or the debtor. The debtor may be either a person or an entity such as a company. Collection of debts from individual people is subject to much more restrictive rules than enforcement against a business.[8]

Collection practices

Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt. These practices are highly regulated by the Fair Debt Collection Practices Act, state laws to protect consumers, and the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission, and state regulatory agencies. Several federal and state higher court decisions have outlined several bad practices: Heintz v. Jenkins, In re: Vinhee, Mcollough v. Johnson, and Rodenburg, Lauinger, Komarova v. Nation Credit Acceptance Inc.

In the United States, 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, 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 8 a.m. and 9 p.m. local standard time. The collector may not use illegal and deceptive practices (e.g., threatening the debtor with arrest or impersonating law enforcement). The collector cannot use obscene language and must inform the debtor of the nature of the call, their name, and the name of the collection company when requested.

International debt collection is a specialised field. Not many companies specialize in this sort of collection as there may be a need to speak different languages and have a knowledge of the different legal systems and laws. International collection calls are often made in a different language than used in the collecting company. Few companies offer a network of local debt collection specialists. Via this network, creditors are served in their own language via their "own" collection agency, and debts are collected via the local partner abroad. The local partner is aware of the national laws and regulations, and often aware of the debtor profiles in their region. Due to this approach, international debts can be successfully collected via local debt collection specialists.

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 United States, the FDCPA allows a collector to call a neighbor or relative for help in locating the debtor, but they may only ask for "address, home phone number, and place of work" and are "not permitted to discuss [the] debt with anyone other than [the debtor], [their] spouse, or [their] attorney".[9] The debtor can give permission to the collection agency to speak to somebody else besides the above-mentioned. 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.[8] Collectors may contact a debtor at the workplace unless the collector has been informed the employer prohibits such calls.[10]

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. Under the United States' FDCPA, anyone has the right for any reason to request written validation of the debt or to demand the collector cease communication.[11]

Relatives of deceased people do not necessarily themselves have to pay the debts of the deceased,[12] but debts must be paid by the deceased person's estate. A home owned by a family of several people, where one person has an unpaid debt, can be forcefully sold, forcing all people to move, maybe all becoming homeless.

Collection account

A collection account is a person's loan or debt that has been submitted to a collection agency through a creditor.[13]

Credit record

Defaulted debts are placed by an alleged debt owner 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. This may not necessarily be properly authenticated or checked to be accurate.[14]

United States

In the United States, if an error occurs in the reporting of debt, the credit reporting agencies and information suppliers have a 21-day safe harbor period to correct the error and the safe harbor period can be used as an affirmative defense in a lawsuit.[15][16]

If a debtor pays off a collection account, the item will be marked "paid", but not removed from credit reports.[17]

If information about debt that appears on a credit report is disputed by the debtor, the credit reporting agency must investigate the dispute.[18] Unless the dispute is deemed frivolous, the credit reporting agency must normally complete its investigation within thirty days.[18]

Re-aging of debt

In some instances, a debt collector will attempt to revive a debt that has expired due to the statute of limitations by themselves making a payment on the debt, "to re-age the account in order to have more time to collect".[19] Such a payment, usually in a relatively small amount, may appear on a credit card statement as an "agency payment" or "transactional payment", and may also be referred to as a "phantom payment" since it is made by the collection agency, without the knowledge or permission of the debtor. Because this payment is not made by the debtor, an agency payment does not extend the statute of limitations beyond the last date when the debtor personally made a payment on the debt,[20] and will be disregarded by the courts, absent evidence showing the payment method used and connecting this to the debtor. If such a payment is represented as a payment by the debtor without such evidence, this representation constitutes a fraud on the court, and it is advised that such an activity be reported to the "FTC's Bureau of Consumer Protection or your state attorney general".[21]

Regulation of collection agencies

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.[22] Regulations include calling times, frequency of calls and requirements for mailing correspondence prior making telephone contact.[23] Most debts in Ontario and Alberta are subject to a limitation period of two years. Most other provinces the limitation period is six years. After the corresponding (two or six, depending on province) anniversary of the last formal intention to pay the debt, the collection agency nor anyone else has legal authority to collect it.[24] Credit bureaus will still retain the debt and the collection on your credit file for 6–7 years depending on province. Although the collection agency can continue to collect or attempt to collect the debt, they cannot garnish or place a lien on the debtor past the limitation period unless the court upholds a new date of last activity on the account based on other factors.

In Manitoba, the governing document is the Manitoba Consumer Protection Act. Complaints regarding violations of the Act should be directed to the Manitoba Consumer Protection Board who will either mediate or enforce the act when it is broken.

For further information, see the Ontario regulations[25] section on prohibited practices.

Province-specific statutes:[26]

United Kingdom

In the UK, debt collection agencies are licensed and regulated by the Financial Conduct Authority (FCA).[27] The FCA sets guidelines on how debt collection agencies can operate and lists examples of unfair practices.[28] These guidelines are not law but they represent a summary and interpretation of various legal areas. Compliance with these guidelines is also used as a test of whether the agency is considered fit to hold a credit licence.

Examples of unfair practices include misrepresenting enforcement powers (e.g., claiming that property may be seized), falsely claiming to be acting in an official capacity, harassment, claiming unenforceable or excessive charges, misrepresenting the legal position to a debtor, and falsely claiming that a court judgement has been obtained when it has not. The legal basis for these practices comes from section 40 of the Administration of Justice Act 1970.[29]

Collection agencies and their debt collectors in the UK are not the same as court-appointed bailiffs.

Scotland

Collection agencies and debt collectors based in the UK are permitted to invite debtors to attempt to repay debts but have no statutory authority in law to enforce debts. Similarly, court appointed bailiffs have no statutory authority to act in Scotland. Debt collection in Scotland can only be carried out by a sheriff officer or a messenger-at-arms.

Spain

If talking to the debtor is unfruitful, a creditor can write a letter to the debtor outlining the following details:

The assignment of the claim against the debt shall not be effective if the assigned debt is not real, legitimate, receivable arises from a crime or the debtor is a public institution, political party or homeless individual.

A collection agency is usually better and faster. Some dress in costumes[30] just to underline the message.

United States

The Federal Trade Commission is the primary federal regulator of collection agencies, although the Bureau of Consumer Financial Protection—created in 2010 and housed within the U.S. Federal Reserve—will also have regulatory power over collection agencies.[31] The CFPB announced on October 24, 2012, that it had finalized the rule for supervising debt collection agencies and debt buyers under a definition that would include about 175 U.S. companies.[32]

Many U.S. states and a few cities require collection agencies be licensed and/or bonded. In addition, many States have laws regulating debt collection, to which agencies must adhere (see fair debt collection).

The Fair Debt Collection Practices Act is the primary federal law governing debt collection practices. The FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that violates the Act. Alternatively, 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).[33] Section 809 of the Act directs that for disputed debts "the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt". When consumers resort to lawsuits against collectors who fail to verify debts, the collector is liable for the complainant's legal costs if the debt is found to be bogus.[34]

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.

In addition to state and federal laws, many U.S. collection agencies belong to trade association called ACA International and agree to abide by its code of ethics as a condition of membership. ACA's standards of conduct require its members to treat consumers with dignity and respect, and to appoint an officer with sufficient authority to handle consumer complaints. Consumers may attempt to resolve disputes with a collection agency who is a member of ACA through that organization's consumer complaint resolution program.

According to Yahoo! Finance, between 2010 and 2016 the Federal Trade Commission banned more than 60 companies that did not follow the Fair Debt Collection Practices Act. [35]

History of debt collection

The history of debt collection is older than the history of money itself, for debts can be incurred in coin-less barter systems just as easily. (See: Barter)

Under Babylonian Law, strict guidelines governed the repayment of debts, including several basic debtor protections.

Both the Bible and Quran issue stern restrictions regarding how much interest to charge on a loan. In occupied territories of the Roman Empire, tax collectors were frequently associated with extortion, greed, and abuse of power.

In medieval England, a catchpole, formerly a freelance tax collector, was a legal official, working for the bailiff, responsible for collecting debts, using often coercive methods.[36]

During the Great Depression of the 1930s in the United States, large financial institutions relied heavily upon foreclosure to collect outstanding mortgage debts, which gained an overwhelmingly negative public perception.

Creditors have more recently begun investigating less forceful methods for collecting debts from customers.

See also

References

  1. ↑ Dlabay, Les R.; Burrow, James L.; Brad, Brad (2009). Intro to Business. Mason, Ohio: South-Western Cengage Learning. p. 472. ISBN 978-0-538-44561-0.
  2. ↑ English, Dale (10 December 2001). "Sector specialization important when choosing collection agency (How to Hire a Collection Agency)". The Business Review (Albany, NY). 28 (36): S5(1).
  3. ↑ David Graeber (2011). Debt: The First 5000 Years.
  4. 1 2 Legrady, Paul (September 2005). "Creditors Exercising Options For Receivables Management". Business Credit. 107 (8): 62–63.
  5. ↑ "CONSUMER CREDIT BILL (Hansard, 14 November 1973)". Hansard. 14 November 1973. Retrieved 6 October 2009.
  6. ↑ Palmeri, Christopher (14 November 2005). "Debt Collection Puts On a Suit". BusinessWeek (3959): 86.
  7. ↑ "Regulatory States: Debt Buyers - Collection Licenses". Collection Licenses. Retrieved 2016-01-13.
  8. 1 2 "Fair Debt Collection Practices Act" (PDF). Retrieved 29 July 2015.
  9. ↑ "Debt Collection FAQs: A Guide for Consumers", U.S. Federal Trade Commission
  10. ↑ "Fair Debt Collection Practices Act" (PDF). Retrieved 29 July 2015.
  11. ↑ "Fair Debt Collection Practices Act" (PDF). Retrieved 29 July 2015.
  12. ↑ Streitfeld, David (4 March 2009). "You're Dead? That Won't Stop the Debt Collector". The New York Times.
  13. ↑ "Get CreditSmart!: Lessons to Help You Understand, Build and Maintain Better Credit" (PDF). Freddie Mac. Retrieved 23 March 2015.
  14. ↑ Okocha v. Trans Union LLC, 2011 U.S. Dist. LEXIS 39998 (E.D.N.Y. Mar. 31, 2011)
  15. ↑ "15 U.S. Code § 1681n - Civil liability for willful noncompliance". Legal Information Institute. Cornell Law School. Retrieved 23 March 2015.
  16. ↑ "15 U.S.C. § 1681o: US Code - Section 1681O: Civil liability for negligent noncompliance". FindLaw. Retrieved 14 June 2017.
  17. ↑ "The Difference Between “Closed” and “Paid-in-Full”". Experian. 15 August 2013. Retrieved 14 June 2017.
  18. 1 2 "Disputing Errors on Credit Reports". Federal Trade Commission. February 2017. Retrieved 14 June 2017.
  19. ↑ Merlon Harper, Financial Freedom: A Guide for Personal Finances (2015), p. 20.
  20. ↑ "Re-aging Accounts - Legal and Illegal Methods by Collection Agencies".
  21. ↑ "What to do to keep debt from re-aging". CreditCards.com. August 20, 2016.
  22. ↑ "Collection Agencies Act of Ontario". Archived from the original on 6 October 2006. Retrieved 7 December 2006.
  23. ↑ "Information on collection agencies". Retrieved 7 December 2006.
  24. ↑ "Limitations Act of Ontario". Archived from the original on 1 December 2006. Retrieved 7 December 2006.
  25. ↑ "Collection Agencies Act - R.R.O. 1990, Reg 74". e-Laws. Queen's Printer for Ontario. Retrieved 20 September 2012.
  26. ↑ Johnson, Margaret H. "Stop Creditor Harassment". Debt Canada. Retrieved 20 September 2012.
  27. ↑ "online technical resource: debt collecting". Financial Ombudsman Service.
  28. ↑ "Consumer credit countdown – Review into debt collection practices of payday lenders starts on day one of FCA regulation". Retrieved 29 July 2015.
  29. ↑ "Punishment for unlawful harassment of debtors". Retrieved 16 July 2010.
  30. ↑ "Boom time for Spain's costumed debt collectors". 8 September 2008.
  31. ↑ "The Consumer Financial Protection Bureau : Measuring the Progress of a New Agency" (PDF). Bipartisan Policy Center. September 2013. Retrieved 14 June 2017.
  32. ↑ "CFPB to Oversee Debt Collectors". CFPB. Consumer Financial Protection Bureau. 24 October 2012. Retrieved 14 June 2017.
  33. ↑ "Selected Commission FCRA Actions". Retrieved 9 May 2006.
  34. ↑ "When debt collector seeks payment, who has burden of proof?". Los Angeles Times. 2013-07-08. Retrieved 14 June 2017.
  35. ↑ "How to get the debt collector to pay you". 2016-11-21. Retrieved 14 June 2017.
  36. ↑ World Wide Words: Issue 825: 30 March 2013, 'Catchpole'
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