There are many reasons people don't pay their debts - financial setback, poor repayment habits, overspending or sometimes they're just not happy with a product they bought. When they fall behind on their payments, a commercial collection agency is just around the corner.
Most collections activity is performed by third-party collection agencies, 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.
Agencies often work on commission, receiving a percentage of the amount that they collect. Other 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. The chances of getting the money back from the debtor decrease substantially with time so an agency might only pay 1% to 5% of face value. The agencies' profits come from the difference between the purchase price and the amounts that are eventually collected.
Tools of the Trade
The chief means of a commercial collection agency of getting a debtor to pay their debts is through letters and telephone calls.
A.) Letters- The letters are computer-generated, and are often in a standardized series which starts with a friendly reminder tone, and may progress to ultimatums depending on the response of the debtor. Collection letters will always encourage the debtor to call the collection agency on the phone. If the debtor doesn't call, then a collector will often call the debtor.
B.) Phone calls- Phone collectors spend their day calling debtors to settle debts, their paychecks often dependent upon how much they extract from debtors. There are limitations in calls made by collectors, among which are if they reach an answering machine or voice mail, they can leave a message, but are prohibited from explaining the reason for the call, since someone besides the debtor might hear it; if they reach someone else at the same residence, they are legally prohibited from disclosing the reason for the call. Collectors can call the debtor's place of employment, but they cannot legally tell your employer about the debt, or try to have you fired. A commercial collection agency is required to provide a phone number which is free for the debtor to call.
Penalties
A commercial collection agency has only two options for anyone resistant or hostile in settling accounts, the credit bureau report and the lawsuit. Collection agencies may report a debt to one or more of the credit bureaus, as a "Collection Account", including the amount, and whether it was paid or not. Paying off a collection account will not result in the item being removed from the consumer's credit reports-it will simply be marked "Paid". They stay on the credit reports up to seven years based on the date of the original delinquency.
If the balance is large, the debtor is being resistant, and if there are indications that the debtor has vulnerable assets, the agency may send the account back to the creditor with a recommendation to sue. They tend to avoid this, because it sends a negative message to the creditor that they aren't very good at collecting, and letters and phone calls are much less expensive than going to court.
Tips for handling bad debts and even worse collectors
• If possible, pay the money you owe. If you cannot pay all at once, suggest making partial payments.
• Never send cash. Always get a receipt- either a cancelled check from your bank or a receipt from the agency.
• Once the account has been officially turned over to a collection agency, don't contact the original creditor-this just creates confusion.
• A positive attitude and good faith towards the agency will bring more agency cooperation. Don't bounce checks or miss payments. If your financial situation changes, contact the agency.
• Debts should not be treated lightly. They can result in bad credit and, even worse, court action, which could lead to money being taken from your paycheck or seizure of your assets.
By Greg Hitchcock