Collection Agencies

By Dylan Mazeika

Collection agencies are businesses that collect past-due bills and accounts receivable for other persons or businesses in exchange for a fee. Collection agencies charge for their services one of three ways:

• A flat fee
• A percentage of what is collected
• Through a direct sale of the delinquent accounts

Flat Fee: If you have a group of smaller unpaid invoices, you may find it to your advantage to use an agency that provides a service for a flat fee. The premise is that they will work equally hard on all accounts rather than the larger accounts that will bring in more money. If this is the direction you choose, always ask for the verifiable success rate of the agency.

Percentage: If you have just a few large unpaid receivables, work with a collection agency that charges a percent of the total debt collected (usually 25 to 50 percent). If you have one or more accounts within the same dollar amount you will be assured that they all will receive equal times and treatment. Since you are no paying up-front for services, thus type of an arrangement makes for collectors who are more "hungry."

Direct Sale: You can also sell your uncollected receivables at a discount to a collection agency. This is advisable only if you have a very large amount of debt &- $1 million or more. The selling price is typically a minuscule 2 to 8 cents on the dollar. However, you do receive your funds up-front and you no longer have to deal with the customer on collection issues.

The Ways and Means of Collecting Debts

Letters: collection agencies begin the collection process by sending a series of three notification letters, often called demand letters. The final notification letter generally warns the debt dodger that if the past-due account is not paid by a certain date, his or her name or company will be reported to one or all of the big three credit-report bureaus - Equifax, Experian or TransUnion. This warning often prompts action, since unpaid debts stay on a credit report for seven years once reported. Too many reports of unpaid bills on a credit report can lead to denial of future credit.

Direct contact via the telephone: Many collection agencies also pay their staff to telephone or visit the debtor directly. This direct contact is most useful if your goal is to maintain a good relationship with the debtor. Often, with the help of a collection agency, a flexible payment plan can be worked out and a business relationship can continue.

Skip Tracing: Besides sending out letters and making phone calls, some collection agencies also specialize in locating debtors who can no longer be reached at the address or phone number listed on their accounts. To determine whether your collection agency offers this service, ask them about their "skip tracing" abilities.

Litigation: Suing the debtor is the last resort in collections. It can be time consuming and expensive. Some collection agencies have counsel on-staff just for these instances so no outside attorneys need to be hired. If the debt is under the threshold, a judgment can be won in Small Claims Court.