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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.
An increasing number of agencies, sometimes
referred to as "debt buyers", purchase debts from creditors for a fraction
of the value of the debt and pursue the debtor for the full balance, or even
include "interest" in the balance owed.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.
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.
Collection practices in the USA are generally, but not always, governed by
the Fair Debt Collection Practices Act. Violating the FDCPA or any other
state or federal laws can result in the levying of large fines against the
collection agency, sometimes even criminal proceedings in extreme cases.
Debtors can even file suit against collection agencies for violations and be
awarded monetary damages.
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 the Fair Debt Collection Practices Act which governs third
party collection agencie
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, most creditors will retain
accounts with first party agencies for a period of around 6 months before
the debt is written off and passed to a third party agency.
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 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 will
then take a percentage of the debt that is 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 and very often this fee is 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 fee ranges
from 10% to 50% (though more typically the fee is 15% to 35%).
Some agencies offer a flat fee, typically
$10.00, "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 the USA, 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. This act
limits the hours during which the agency may call the debtor and prohibits
communication of the debt to a third party. It also prohibits false,
deceptive or misleading representations, and prohibits the agency from
making threats of actions the agency cannot lawfully or does not intend to
take.
In the United Kingdom third party
collection agencies that pursue debts regulated by the Consumer Credit Act
must themselves hold a Consumer Credit Licence; this is a requirement under
the Consumer Credit Act 1974. Licenses are issued and regulated by the
Office of Fair Trading a government body which protects consumers from
unscrupulous traders. In order to retain their licence third party agencies
must work within the framework outlined within the 2003 fair debt collection
guidance.
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. This practice has developed principally in the USA but now the
debt purchase market is burgeoning in the UK, Europe and Asia.
Debtors
The person who owes the bill or debt is
called the debtor. People may become debtors because of a lack of financial
planning or overcommitment on their part, or due to 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.
Collection practices
Debt collectors who work on commission may
be highly motivated to convince debtors to pay the debt, often to the point
that they are threatening or abusive to the debtors. Most people are
accustomed to being treated with a certain amount of customer service and
courtesy and often complain that they do not receive reasonable treatment
from debt collectors. Topical websites that expose this behavior are
increasingly popular and consumer rights attorneys work to inform consumers
of their rights under the FDCPA.
Collection calls
Collection calls inform debtors of their
obligations and motivate repayment. In the US, the FDCPA prohibits 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. Furthermore, a collection agent
must stop calling a debtor by telephone and proceed only via mail if the
debtor sends a cease and desist letter to the agency. The collector also is
prohibited from using deceptive practices (for example, threatening the
debtor with arrest, impersonating law enforcement, or tricking the debtor
into making a payment). The collector cannot use obscene language and must
inform the debtor of their name and the name of the collection company when
requested.
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.
Collection agencies sometimes contact
individuals other than the debtor and this is allowed only with important
limitations. Under the FDCPA, a collector is permitted to call a neighbor or
relative for help in locating the person who owes a debt as long as there is
no communication about the debt. Collectors must state their name and must
give the name of their employer if the person specifically asks. A collector
may 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.
Collectors may contact a debtor at the
workplace unless the collector has been informed the employer prohibits such
calls. When informed of this, the collector must cease all calls to ther
debtors workplace immediately.
At times a person with no connection to the
debt or the debtor may be contacted by a collector in error. Examples
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 USA under the FDCPA, anyone has the right for any reason to request, in
writing, validation of the debt or to demand the collector cease
communication.The collector must cease calling and supply, in writing,
verification of the debt, or else they are in violation of the FDCPA.
Relatives of deceased people are usually
under no obligation to pay off the debts of the deceased with their own
fundsbut the deceased person's estate can be used to pay off such debts.
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