What Is A Collection Company? Pt. 1

What are debt collection agencies?

There are two possibilities.

A number of creditors will do their best to intimidate a debtor by using a separate company name, address, and phone number for their internal collection departments, so that they can give the impression of an “outside” agency. This strategy is should only be used when the debt is recent (under six months past due.)

However, most collections activity is performed by a third-party collection company, which are separate from the original creditors, and “work” debts on behalf of various lenders. They may also buy bad debts which have been designated as charge-offs by the original creditor.

This series of articles will focus on third party collection companies.

How does a debt collection company get money?

Third-party debt collection agencies typically work on commission, this is where they receive a percentage of the amount that they collect. Individual collectors are often paid a low base wage plus commissions based on their personal performance.

Some agencies also purchase large groups of charged-off bad debts for a small percentage of the face value (amount owed.) After a debt is sold, the debtor now owes the full amount to the purchaser. Since the chances of recovery decrease substantially with time, an agency might only pay 1% – 5% of face value. The agencies’ profits come from the difference between the purchase price and the amounts that are eventually collected.

How do debt collection companies work?

Letters and telephone calls are the primary tools of a collection company.

What is the deal with collection letters?

The 1st demand letter has to say that the recipient has the right to dispute the validity of the debt or request verification of the debt (in writing). Legally, the debt collection company has to send some confirmation after they verif it with the original creditor. Demand letters also must contain the statement that they come from a debt collector, and that any information obtained will be used for the purpose of collecting the debt. Collectors are forbidden to print anything on the outside of the envelope which may indicate or suggest that this is a collection attempt. The return address label must also be discreet, so many companies will just use their company’s initials, or some other nondescript name.

Mallory Megan works for a collections agency that works with a debt collection lawyer. She also does stories on business, finance, consumer spending and collections agencies. This and other unique content ‘financial collection agency’ articles are available with free reprint rights.