What is the Collection Agency?
A collection agency is an agency that is engaged by the lenders and the creditors for the purpose of recovery of the amounts due to them on account of products sold or services rendered by them, that is remaining unpaid by the purchaser for more than a reasonable period of time.
After a creditor has made sufficient attempts for the recovery of the amount due to its from its debtor, it might engage external parties known as a collection agency for the purpose of recovery of the amounts due to it. Once an agency has been engaged, it will make independent efforts for the recovery by taking appropriate steps and actions.
- It is an agency that is used by the lenders and the creditors for the recovery of the debt due to them which are running in default.
- They are covered under the regulations of the Fair Debt Collection Practices Act.
- They get fees based on a certain percentage basis of the debt owed.
- They have expertise in debt collection and have requisite skills for the same.
How Does Collection Agency Work?
- An agency when hired will make attempts for the recovery of the amount due to the debtors. In case the borrower or the debtor concerned pays off the amount involved as a result of steps taken by the agency, the creditor or the lender who engaged the agency will pay fees on the basis of a certain percentage of the amount recovered.
- In another scenario, if the borrower or the debtor doesn’t pay the amount, then this agency can update the collection status in the credit report of such a borrower or debtor. It will result in a decrease in the credit score of such person and it will become difficult for such a person to avail of loans in the future.
- In order to collect the funds, they may carry out various activities such as calling the borrower over the phone, mailing him, communicating with his relatives or appear at his address.
Getting a collection agency involved in the case of non-recovery of amounts due from borrowers or debtors to become important due to the following reasons.
- These agencies make use of advance technologies to make direct communication with the defaulter.
- The agencies are very professional in their approach with good data analysis skills.
- They make use of bulk mailing and SMS services and another form of customized communication which is not only effective but also leaves less scope for error.
How are Debtors Getting Paid by Collection Agencies?
These agencies make recoveries for the defaulting accounts on behalf of the debtors. Against this service, the agency is paid for the same on a certain percentage which is based upon the amount of recovery done by it.
Difference Between Debt Buyers and Collection Agency
#1 – Debt Ownership
- In the case of debt buyers, the ownership of the debt under consideration is transferred to the debt buyer. The debt buyers purchase the debt from the creditors for a discounted amount. It becomes the responsibility of the debt buyer to collect the amount from the debtor in its own name. For the debt recovery, either the debt buyer may make efforts itself or it may hire a third-party agency.
- Meanwhile, in the case of the collection agency, the ownership of the debt remains with the actual creditor only. The collection agency acts as an agent and makes recovery of the amount due on account of the creditor and gets remunerated for the same by the creditor on the percentage basis of the recovery done by it.
#2 – Ageing of the Debtor
- Collection agencies normally collect receivables that are overdue by a maximum of six months.
- On the other hand, debts are bought by the debt buyers that are very old, say about three years old!
#3 – Level of Difficulty in Debt Collection
- The debts that are older are harder to recover. It is why that after multiple attempts are made for debt recovery either by the creditor itself or through a collection agency, the debts are sold to the debt buyers in order to a minimum the loss and recover the minimum amount possible.
- The debts which are not much older are usually assigned to the collection agency. Such debts that are not much older are relatively easier to collect.
- Collection agencies help a creditor in the recovery of overdue amounts from the debtor.
- They are much professional and it is better to involve them instead of making the recovery attempts in-house as it will lead to wastage of time otherwise.
- The chances of getting the recoveries are improved with the involvement of a collection agency.
- These agencies keep a record of each attempt made by them, even if unsuccessful which will be helpful in the future if the creditor decides to sue the debtor.
- Involving a collection agency is usually a costly affair.
- In case the agency does not carry out the communication with the debtor in a professional manner, the customer may be lost.
- Your particular case may not be taken as a priority as the agency will be handling other customers too.
- If this agency becomes harsh in their approach, it may bring negative publicity for the creditor.
Based on the nature of the account and its age, a debt shall be assigned to a collection agency or be sold to a debt buyer after all possible attempts are made for the recovery of the account in-house.
This has been a guide to what is Collection Agency and its definition. Here we discuss characteristics and how does a collection agency work along with its importance and how debtors getting paid from it. You may learn more about financing from the following articles –