Collection agency

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A collection agency is a business that pursues payments on debts owed by individuals or businesses.[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, beginning with first-party agencies who are often times subsidiaries of the original company the debt is owed. Third-party agencies are separate companies contracted by a company to then collect the debts on their behalf for a fee. Another growing industry is debt buyers in which the agency purchases the debt at a fraction of its initial value then collects upon it. Each country has their own rules and regulations regarding collection agencies and their practices which are quite often very aggressive.


[edit] 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.[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 agencies[citation needed].

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 several months before the debt is written off and passed to a third party agency.[citation needed]

[edit] 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 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%).[3]

Some debt purchasers who purchase sizable portfolios will often utilize 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 ARM industry believe there is a competitive advantage in utlizing 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, 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.[citation needed]

In the United States, 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. Licences 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. [4]

[edit] Sale of debts

An increasing number of collection 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. This allows the original company to generate immediate revenue and reduces the public relations risks involved with collection of defaulted accounts receivables[5].

[edit] 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 an unforeseen and uncontrollable event that disrupted their life (i.e. the loss of a well payed job, a disabling accident, or a sudden illness). In other cases a debtor has deliberately refused to pay a creditor and a creditor's only recourse is to use the legal system, or a collection agency, to collect the debt.

In commercial collection cases, the debtor is a business. A business could mean a sole proprietor, a corporation, a partnership such as an LLC, or an individual that incurred the debt for business purposes.

[edit] 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.[citation needed] 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.

[edit] 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. The FDCPA also establishes what time of day calls can be made at, 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 8am and 9pm local standard time. Furthermore, a collection agent must stop all communication (including phone calls and letters) if the debtor sends a cease and desist letter to the agency; unless they have separate state laws such as Wisconsin that allows this to be done verbally. The collector is also 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. 

International debt collection is the same as normal debt collection, except the creditor and debtor are in different countries. There are not many companies that specialize in this sort of collection as there is the need to have many different language speakers in-house and a knowledge of the different legal systems and laws that are in place around the world. In this case 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 an excuse by a debtor 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. Collectors may only ask for "address, home phone number, and place of work." Collectors are "not permitted to discuss [the] debt with anyone other than [the debtor], [their] spouse, or [their] attorney." [6] 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.[7]

Collectors may contact a debtor at the workplace unless the collector has been informed the employer prohibits such calls.[8] When informed of this, the collector must cease all calls to the debtor's workplace immediately.

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, people erroneously targeted due to a similar name, or people who otherwise dispute the validity of the debt. In the United States 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.[9] 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 funds[10], but the deceased person's estate can be pursued to pay off such debts.

[edit] Collection account

Collection account is the term used to describe a person's loan or debt which has been submitted to a collection agency through a creditor.[2] The term is not used on debts with only original creditors.

The collection account normally appears on the credit report of a person (debtor) who has had one or more accounts referred to collection agencies, within the last seven years, but usually only when the account has reached Charge Off status from the original creditor. Not every account placed in collections is necessarily a "credit" account and subject to one of the three major credit bureaus reporting systems. If a debtor pays off a collection account, the item will not be removed from the credit reports - it will simply be marked "Paid."[11]

However, if a dispute regarding the validity of the debt is filed, an agency is prohibited from placing the debt on the debtor's credit report, unless they mark the account as disputed, or until the dispute is resolved and the debt is indeed verified as accurate.

[edit] Regulation of collection agencies

[edit] United States of America

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 Federal Reserve -- will also have regulatory power over collection agencies.[12] Many 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. Alternately, 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).[13]

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, a majority of U.S. collection agencies belong to trade group ACA International and agree to abide by the association's 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 also resolve disputes brought against a collection agency who is a member of ACA through ACA's consumer complaint resolution program.

[edit] 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.[14] Regulations include calling times, frequency of calls and requirements for mailing correspondence prior making telephone contact. [15]. Most debts in Ontario and Alberta are subject to a limitation period of two years. Most other provinces the limitation period is 6 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.[16] 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 section on prohibited practices.

Province-specific statutes[17]:

[edit] United Kingdom

In the UK, debt collection agencies are licensed and regulated by the Office of Fair Trading[18]. The OFT sets guidelines on how debt collection agencies can operate and lists examples of unfair practices[19]. These guidelines are not law, but do 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 license.

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[20] of the Administration of Justice Act 1970.

Collection agencies in the UK should not be confused with court-appointed bailiffs.

[edit] See also

[edit] References

  1. ^ Dlabay, Les R.; Burrow, James L.; Brad, Brad (2009). Intro to Business. Mason, Ohio: South-Western Cengage Learning. p. 472. ISBN 9780538445610. 
  2. ^ English, Dale (2001-12-10). "Sector specialization important when choosing collection agency (How to Hire a Collection Agency)". The Business Review (Albany, NY) 28 (36): S5(1). 
  3. ^ a b Legrady, Paul (2005-09). "Creditors Exercising Options For Receivables Management". Business Credit 107 (8): 62–63. 
  4. ^ "CONSUMER CREDIT BILL (Hansard, 14 November 1973)". Hansard. 14 November 1973. Retrieved 2009-10-06. 
  5. ^ Palmeri, Christopher (2005-11-14). "Debt Collection Puts On a Suit". BusinessWeek (3959): 86. 
  6. ^ Debt Collection FAQs: A Guide for Consumers
  7. ^ The Fair Debt Collection Practices Act, Section 804
  8. ^ The Fair Debt Collection Practices Act, Section 805
  9. ^ The Fair Debt Collection Practices Act, Section 809
  10. ^ Streitfeld, David (2009-03-04). "You’re Dead? That Won’t Stop the Debt Collector". The New York Times. 
  11. ^ Collection Agency FAQ
  12. ^ "Finance Bill Creates Power Sharing, FDCPA Reform Dilemma in Gov’t". Retrieved 2010-08-11. 
  13. ^ "Selected Commission FCRA Actions". Retrieved 2006-05-09. 
  14. ^ "Collection Agencies Act of Ontario". Archived from the original on 2006-10-06. Retrieved 2006-12-07. 
  15. ^ "Information on collection agencies". Retrieved 2006-12-07. 
  16. ^ "Limitations Act of Ontario". Archived from the original on 2006-12-01. Retrieved 2006-12-07. 
  17. ^ [1]
  18. ^ "OFT Consumer Credit Licensing". Retrieved 2007-11-04. 
  19. ^ Debt collection practices
  20. ^ "Punishment for unlawful harassment of debtors". Retrieved 2010-07-16. 

[edit] External links

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