Collection Agencies: A Buyer's Guide

Collection Agency Services

Did you know that approximately 30 million Americans have at least one debt in collections?

Accordingly, uncollected debts cost businesses billions of dollars every year. So, if your business has found it difficult to collect debts from your consumer and commercial customers, you want to make certain you hire a collection agency that will not only successfully reclaim your debts but (perhaps more importantly) won’t reflect poorly on your business.

The Basics

The collection agency industry doesn’t exactly have the best reputation. In fact, consumers have filed more complaints with the Bureau of Consumer Protection over collection agencies than any other business, product, or service.

This guide will educate you on everything you should know before you hire a collection agency so that you can make an informed decision and, ultimately, reclaim your debts quickly, efficiently, and appropriately.

What is it?

Essentially, collection agencies are third-party agencies that act as a middleman between your business and your debtor(s) that specialize in the collection of past due debts. They have direct access to state-of-the-art tools and technologies to help them locate your debtor. They also have access to legal resources in the event litigation becomes necessary in order to recover your debt.

Your debtor — whether it be an individual person or an entity (such as another company) —
may fail to pay for services rendered, fees owed, and/or products delivered for a variety of reasons. This may be due to poor financial planning on their part, an unexpected event (such as job loss or health issues) that has prevented them from making payments, or they may dispute the debt altogether for legitimate or illegitimate reasons.

Regardless of who the debtor is or why they cannot pay, it is vital to your business that your lost revenue is recovered. More importantly, you need to ensure that the debt is collected in an effective, respectful, and lawful manner by choosing a reputable agency.

How will you know which collection agency is right for your business? We can help you decide by reviewing various factors that define what a collection agency actually is. First, we will discuss the difference between collection agencies and debt buyers before detailing the process and guidelines that reputable agencies follow. Then, we will inform you on which industries use collection agencies, when to hire an agency, what to look for, and what to avoid.

Collection agency vs. debt buyer

There are two different business models in the collections industry. Each work to collect a debt on your behalf, however, the difference lies in who owns the debt.

Collection agencies are essentially the middleman between you (the creditor) and your debtor. Here, you still own the debt. Collection agencies are typically only paid a percentage of the debt that is collected, handing the remainder over to you.

A debt buyer, on the other hand, does precisely what it sounds like. They purchase the debt (or a package/bundle of debts) from a creditor at a discounted price. In this situation, the debt buyer is the owner of the debt and therefore keeps the entire amount that they are able to collect.

Whether you choose to hire a collection agency or a debt buyer to reclaim delinquent accounts will depend on what percentage of the debt you are satisfied with recovering. If you no longer wish to own the debt and would rather sell it for pennies-on-the-dollar, then a debt buyer will guarantee that you at least receive a small percentage of the amount owed.

However, if you’d like to receive a greater percentage of the amount collected, then hiring a collection agency is the way to go.

Who is it for?

When most people think of collection agencies, they likely associate them with three major types of debts: credit card, student loan, and medical. And for good reason, too. In fact, the average U.S. household has $15,000 in credit card debt. Similarly, U.S. college graduates have racked up about $29,000 in student loan debt by the time they receive their degree.

Despite this, the number one cause of bankruptcy is not due to credit card or student loan debt, but rather unpaid medical bills. If your business is in any of these industries, chances are that you’ll have consumers that owe you money, and lots of it.

Other common types of debt are associated with insurance (health, life, car, etc.), utilities, mortgages, and loans (personal, auto, etc.).
Regardless of what industry your business specializes in, it is best to hire a collection agency that is familiar with that industry. The agency should be well-versed with the terminology in your industry and, if applicable, the rules and regulations set forth by state and/or federal agencies that govern your industry.

Does your business service several different industries? There are collection agencies that specialize in more than one industry, and hiring one that does can help you maximize the success of reclaiming as much debt as possible.

Additionally, some collection agencies only focus on local or statewide debts, while others are national. So, if your business has delinquent accounts in several different states, then you’ll want to choose an agency that can accommodate multi-state collections.

Once again, your debtor may not be an individual consumer but could be an entity such as another business, municipality, or other commercial enterprise. The biggest difference between collecting consumer debt and commercial debt is legalities created to protect each of these specific categories, a notable one being the Fair Debt Collections Practices Act (FDCPA).

FDCPA

Unfortunately, collection agencies have an unpleasant reputation; consumers don’t typically enjoy being reminded of how much debt they have. On top of that, some agencies rely on unscrupulous, harassing, or illegal tactics in their collection methods. Since 1978, however, the Fair Debt Collections Practices Act (FDCPA) has been protecting consumers from unfair and illegal debt collection methods.

This Act applies only to consumer (not commercial) debts that are being collected by a third-party agency, allowing consumers to file private lawsuits against a collection agency that violates the Act. In fact, between 2010 and 2016, the Federal Trade Commission banned more than 60 companies that did not follow the FDCPA.

Furthermore, in extreme cases, your business can face litigation for hiring an unlawful collection agency, even if you weren’t aware of their actions. Therefore, it is of the utmost importance that when collecting consumer debt, you choose an agency that follows FDCPA guidelines. But that, alone, is not the only thing you should look for in an agency (hint: check out our section on what to look for).

The collections process

Whether you are looking to collect thousands of dollars of credit card debt or a few hundred bucks in unpaid parking tickets, the process a collection agency follows is essentially the same.

Collection Strategy: Debtors will be presented with multiple opportunities and options to assist them in paying their bill. The methods used by the collectors are industry-specific with client protocols integrated into their strategy.
- Contact debtor: This can be done by phone, in writing, via email, and, at times, even in person. Typically, the agency will mail a series of letters and contact the debtor by phone until they agree to pay the debt in full or arrange a payment plan. If the debtor does not agree to pay, then the following strategies may be implemented:
- Asset verification: The agency will verify what valuable assets (real property, bank accounts, places of employment, etc.) the debtor has in order to establish the practicality for litigation. This information is used to help determine if the delinquent account is worth the time and money to file a lawsuit against. For example, if the debtor has a steady income or bank account, then that proves that regular payments can be made to pay off the debt.
- Credit reporting: With your authorization, the collection agency will report the delinquent account the three major credit bureaus (Experian, Equifax, and Trans Union). This provides leverage in collecting the outstanding debt because once an account is placed under collections with these bureaus, that information will remain on a debtor’s credit report for up to seven years. Any other creditors will be alerted of this information when the debtor applies for credit within this time period.
- Skip tracing: Collectors are trained to use a variety of state-of-the-art public and proprietary information databases to locate missing or otherwise hard-to-locate debtors. Even if your debtor has moved to a different state and changed their phone number, with these tools and technologies, the agency will be able to locate them.
- Legal forwarding and liaison services: When all other methods have proven unsuccessful, then litigation may be necessary. Most collection agencies have an in-house legal department that works closely with attorneys to help manage the litigation process on your behalf. Only with your prior authorization are agencies allowed to pursue legal action. They will manage the lawsuit for you and provide information and guidance to you along the way. Depending on your service-level agreement (SLA), initiating legal recourse may result in additional fees.
Reconciliation or termination: Settlements are accepted only with your authorization. Statements summarizing all payment activity are generated monthly while accounts not collected within the established collection strategy are returned to you as uncollectible.

Options

Since there are certain legalities and guidelines that reputable collection agencies must follow, there aren’t a ton of variances in service options. Although there are certain things you should look for in an agency that will make one service provider better than another, the most important option to consider when choosing a collection agency is how they structure their pricing and fees.

Pricing/fees

It’s important to note that once you’ve hired a debt collector, you will not receive the full amount of what you are owed; a percentage of it will go to the agency collecting the debt on your behalf. Factors that go into collection agency fees include the size of the debt portfolio, type of work required to collect, the age of the account, as well as the agency’s experience. There are two common ways pricing is structured.

Most common is contingency-based pricing. In this arrangement, the collection agency doesn’t get paid until the debt is successfully collected. These contingency fees can range from 10% for large debts that go into collection early to 50% or more for smaller, older debts. The average contingency fee is closer to 25-35%.

At times, an agency may settle the debt for a compromised amount if the debtor is able to pay it in a lump sum. It’s also common for collection agencies to set up a partial payment arrangement with the debtor. Although you may be initially disappointed that you are not receiving the full amount of the debt owed, keep in mind that without the help of the collection agency, you likely would not have received any portion of the debt; reclaiming 75% of a debt is better than reclaiming 0%.

Another fee structure that collection agencies use, although less common, is a flat fee that you will pay upfront. This is a straight-forward, fairly small fee that is generally offered early in the debt collection process. An agency typically uses this fee structure if the debt is less than 90 days old. This is usually associated with a “pre-collection” or “soft collection” service. In this situation, the agency will send a series of letters to the debtor urging them to pay the debt directly to you. If the debtor is unresponsive, then traditional, “hard collection” services will be employed and you will be charged according to your Service-Level Agreement (SLA).

Another fee structure that is also uncommon (although not unheard of) is based on activity. With this, you will pay the collection agency a fee for each activity they perform in order to reclaim the debt. For example, you will be charged for any letters they send, for any skip tracing that is performed, etc.

Tips

When to hire a collection agency

Now that you are familiar with the process that collection agencies take as well as how they are paid, you may be wondering how to know when it’s time to hire one. You should seek the services of a collection agency when:

The account is between 90 to 120 days past due. Waiting longer decreases your chances of recovering the debt.
New customers do not respond to your first attempt to collect. Since you don’t have a history of transactions with them, they may be more likely to skip on payments.
You’ve agreed to a payment plan, but the customer does not follow through.
Customer completely denies responsibility for the debt.
Customer makes unfounded complaints about your business, product, or service as an excuse not to pay.
Customer has a long history of being financially irresponsible.

What information you’ll need to provide

Once you have decided to hire a collection agency, be prepared to provide the following information regarding the delinquent account(s):

Debtor’s name (legal name as well as nicknames, maiden names, and aliases), address (residential and email), and their phone number (telephone and/or cell phone).
Information about how (or if) the debtor has responded to your debt collection efforts.
Any details and paperwork related to the transaction, including contracts and credit applications.
May also be asked to provide name of the debtor’s spouse, friends, relatives, and neighbors.

What to look for

Hiring a reputable agency will not only increase your chances of the debt being recovered, but it will also be an extension of how you conduct your own business. If you don’t hire a legitimate agency, it will reflect poorly on your business and, in extreme cases, can even subject you to litigation due to their unlawful practices. You want an agency that works as a partner in recovering your debt, not just as hired help.

So, in addition to ensuring the agency follows FDCPA guidelines (if collecting consumer debt), there are a few other things that you should look for.

Licensed and/or bonded

Make sure the collection agency is state-licensed and/or bonded. Many, but not all, states require one or both certifications. In fact, 32 U.S. states require collection agencies to be licensed. This means that the agency has gone through in-depth examination of its financial stability, its insurance status, and the background of its owners. Agencies need to renew their license every year.

Some states also require a collection agency to be bonded. A bonded agency is one that, in the event they go out of business or do not settle payments with you, can have a claim filed against them for the value of the bond. Basically, this protects your business if anything were to go wrong with the collection agency.

To summarize, licensing protects consumers from illegitimate collectors while bonding protects creditors from insolvent collectors. You should always be sure the agency you hire is compliant with state regulations.

Errors and omissions liability insurance

Another way to make sure you are hiring a reputable collection agency is to look for one that has Errors and Omissions Liability Insurance (E&O). E&O insurance protects the agency against any mistakes made by its employees. Although this insurance is not required by law, it is a sign that the agency can be trusted and will be held accountable for any misconduct. This insurance protects the agency if there are any claims made by consumers against them for improper conduct.

Technologies

In addition to skip tracing, there are several other technologies and tools that collection agencies have that are helpful to not just their collection strategy but also to how they share information with you.

Digital technologies that allow debtors to negotiate payments or file a dispute online are particularly appealing to younger demographics of debtors. If making payments to a collection agency is as easy and streamlined as possible, then debtors may be more likely to settle their debts. Similarly, an agency that provides online access to you, the creditor, is especially helpful. This can allow you to monitor the status of accounts, communicate with the agency, and run reports on the status of your collections.

Finally, some collection agencies have algorithm-based collections processes. With this technology, agencies are able to build a profile to better understand the debtor. This information provides agencies with the foresight to know which collection processes will work better (or worse) for different types of debtors.

What to avoid

Just as there are particular things to look for when hiring a collection agency, there are certain things that you should avoid. Of course, any agency that relies on harassing or illegal tactics to collect a debt should not be trusted. In extreme case, you can face litigation for hiring an illegitimate or unlawful collection agency, even if you are unaware of their actions.

Questions to ask the collection agency before hiring

What types of debt do you specialize in?
Do you have experience in collecting debts in a similar situation to mine?
What fees do you charge? Is it a flat fee or contingency-based?
If contingency-based, at what percentage will this fee be?
Are you licensed, bonded, and/or insured?
Do you follow FDCPA guidelines?
What is your collection process like?
What technologies and tools do you utilize to reclaim debts as well as to manage the accounts?

Ready to hire a collection agency?

Deciding when to hire a collection agency is a personal choice. However, once it becomes clear you’ve exhausted all your options, the debt is better left in the hands of a professional agency. We can help match you with up to five collection agencies in your region. Just fill out our form and we’ll do the rest.