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What Is a Collection Agency?
by Jason Reeher
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Overview
If you have ever fallen behind on your bills, you probably received calls from a collection agency. Collection agencies are often the last stop for an unpaid bill before the bill is either charged off or legal action is taken against the debtor. Few people understand what collection agencies are and the role they play in the debt management industry.
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Function
Debt collection agencies function by attempting to obtain payment for outstanding consumer debt. Collection agencies may own the debt outright or simply be hired by a firm to collect payments on the firm's behalf. Collections activity is regulated largely through state law; state attorneys general oversee debt collection practices, setting rules for consumer contact and processing consumer complaints regarding debt collection. The Federal Trade Commission also oversees third-party collection, largely through the Fair Debt Collection Practices Act
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Features
Debt collection firms are staffed by agents whose primary job is to contact debtors. Collection agents often spend their entire work shift on the telephone; they also send letters to people who owe money to attempt to collect the unpaid debt. A collection agency normally contracts work; this means that accounts may derive from a number of public and private firms, as well as from nonprofit creditors, such as hospitals. Collection agents are sometimes paid on commission, receiving a percentage of each debt collected.
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Benefits
Because most companies have limited human resources, one benefit of hiring a collection agency is the outsourcing of a time-consuming (and sometimes quite difficult) task. With a company's employees freed from collection duties, those employees can concentrate on other jobs, such as sales and marketing, for example. Another key benefit of the collection agency is task efficiency. Since agents concentrate on one main task---the collection of debt---the collection agency benefits from a simplified business model. Metrics, or measurements of success, are therefore relatively easy to calculate. Collection agents may be assessed on delinquency rates for a list of accounts, as well as time spent in contact with customers.
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Effects
Collection agencies argue that their organizations make debt collection more efficient and that consumers are more likely to pay once a debt is turned over to a collection agency. This results in a lower debt delinquency rate for society overall.
Another effect of collection agencies is the potential reduction in court cases. Since legal action is a relatively expensive means by which to collect debt, collection agencies reduce the cost of debt collection, decreasing legal fees for companies and consumers while unburdening courts from a larger percentage of debt cases.
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Misconceptions
Collection agencies can contact consumers and request payment of debt. They cannot, however, seize assets or threaten debtors' jobs, nor can an agency publicize the debt. In addition, when the original creditor still owns the debt, a collection agency cannot, on its own, take legal action. Instead, if the collection agency is unable to recover the debt, the agency can only recommend that the original creditor take legal action at that point. Under the Fair Debt Collection Practices Act, collectors cannot call debtors at all unless the debtor has consented to such a call. The same law also prohibits harassment and abusive language by collection agency employees, as well as calls before 8 a.m. and after 9 p.m. local time.
