A collection agency is an organization whose purpose is to collect bad debts. Credit accounts that are delinquent are turned over to these firms through a number of different agreements to collect the money that is owned to the original creditor. Collection agencies are monitored and regulated by the Federal Trade Commission (FTC) and must follow federal requirements laid out by the Fair Debt Collection Practices Act.
Definition
According to the FTC, a debt collector is a business that collects bad debts as a full-time service. A debt collector may be an attorney's office, a collection agency or a company that buys delinquent accounts from lenders at a reduced rate and then tries to collect as much as they can from the debtor. The Fair Debt Collection Practices Act covers only personal loans. Business loans are not protected by the regulations.
Practices
Collection agencies use mail and telephone calls to collect the debts they have contracted to service. Citizens cannot be contacted by collection agencies before 8 a.m. or after 9 p.m. without permission. They may not contact debtors at their place of business once they have been told orally or in writing to cease contact at a workplace. Collection agencies must deal with a citizen's attorney if one has been retained for that purpose. Collectors are prohibited from using verbal abuse and harassment of any kind, and they cannot make any false claims or inaccurate threats.
Legalities
Collection agencies may take a debtor to court and sue for the amount owed. The court may issue a judgment, which gives the collection agency legal grounds to garnish wages for the overdue amount. A legal garnishment requires employers or banks to withhold a portion of a debtor's wages or other income to satisfy the debt. There are variety of federal benefits that are exempt from garnishment.
Timing
According to the Commercial Collection Agency Association, collection agencies are ultimately more successful when they receive overdue accounts within the first 90 days of being delinquent. When an account is six months overdue, the chance of a successful collection drops to about 62 percent. After one year, a collection agency has only a 22.8 percent chance of collecting the overdue money and only a little more than 9 percent chance after two years. As a result, collection agencies must be most aggressive when they first land a new account for collection.
Payments
There are a number of ways that collection agencies earn money. Some firms charge creditors a set fee per account that they try to collect. Others offer flat fess for a certain amount of accounts. Other collectors operate on a percentage of the successful collections they receive on behalf of their clients that typically range from 18 to 30 percent. Other firms purchase bad debt portfolios directly from companies with outstanding credit accounts at a reduced rate, as low as 50 percent or less of the face value of the loan.
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