What is a Collection Agency?
One of the main facets of the American economy, or any economy for that matter, is the availability of credit. While it is simple to make necessary purchases each month without credit, such as groceries, gas for the car, or utility bills; bigger purchases require credit of one type or another in order to be completed. Buying a home, a car, or receiving medical services are just a few examples of products or services that are often paid for initially with credit, allowing debtors to repay the value over time. However, when a debtor becomes unable to repay their debt and falls behind on their payments a collection agency is often brought in to try and resolve the problem between a creditor and debtor.
Collection agencies exist and operate in three different manners. These different collection agencies often conduct business in drastically different manners depending upon their direct or indirect involvement in the situation. The three types of collection agencies are:
- First party collection agency
- Third party collection agency
- Debt purchasing agency
A first party collection agency is a department within or related to the creditor who is owed money by a debtor. Agents in this party are usually the first to work on a debt case, contacting debtors in hopes of resolving debt issues. Because these groups have bad direct contact with the debtor as a customer and a directly related to the creditor, they tend to conduct business in a constructive manner in order to avoid alienating the debtor.
First party collection agencies will often work for several months to resolve a credit dispute with a debtor before turning the case over to another party. In many cases the creditor will turn the case over to a third party collection agency. This group will take over the business of contacting the debtor and trying to arrange for repayment of the debt. Third party groups agree to a fee with the creditor for their services, but will not charge the creditor for their service until the debt has been repaid.
If a first party collection agency decides not to turn the case over to a third party collection agency and wants to instead just rid themselves of the issue, they have the option of dealing with a debt purchaser instead. Debt purchasing agencies buy the debt from a creditor for a reduced cost. This allows the creditor to rid themselves of the case and write off the remainder of the debt. A debt purchasing agency will then purse the debtor for the full amount of the debt and even charge interest on top of that from time to time.
Regardless of the agency involved in collection debt from a debtor, there is a typical process that is followed by almost every collection agency. This process includes but is not limited to the following steps:
- Debt case is turned over to collection agency for resolution
- Debt portfolio and supporting documentation are studied by collection agency
- First contact is made with debtor through a demand letter informing them of debt situation
- After a demand letter, collection agencies make contact with debtors via telephone
- Collection agencies attempt to resolve the debt through a repayment plan
- Collection agency will oversee the repayment of the debt or recommend litigation to creditor if debtor continues to be negligent.
In the event that a collection agency is unable to resolve the debt dispute between a creditor and debtor, they can recommend that the creditor move the case toward litigation as a means of settling the debt. No collection agency can take this legal step on their own, as creditors must approve the use of litigation as a means of resolving the dispute. Attorneys are then brought in to review the case and investigate it. They have 60 days to make a recommendation to the creditor on litigation proceedings.
If a creditor decides not to pursue the case through litigation, the debt case can be returned to the collection agency. The collection agency will then, typically, pursue the case for another 60 days before considering it a closed case.
In the United States, collection agencies are required by law to employ fair practices in their debt collection efforts and avoid harsh treatment of debtors. The Fair Debt Collection Practices Act of 1978, as well as additional state enacted laws, provides a set of guidelines that all collection agencies must follow in their pursuit of debt collection. These laws include provisions that:
- Limit the number of times, and manner in which, collection agencies can contact debtors
- Protect debtors from threats of physical harm, abusive language, and other misleading or harassing practices
- Prevents collection agencies from misrepresenting themselves in an attempt to settle debt
- Protects debtors from having their financial standing reported publicly
- Protects debtors from having their assets seized and wages garnished
Collection agencies exist to provide assistance to creditors in settling outstanding debt with debtors who are negligent in their payments. Assuming collection agencies follow the letter of the law, they often conduct their business in a professional manner that is designed to help both sides come to a resolution.