A collection agency is a business that pursues payments of debts owed by individuals or businesses.^[1] Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.^[2]

There are many types of collection agencies. First-party agencies are oftentimes subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. Debt buyers purchase the debt at a percentage of its value, then attempt to collect it. Each country has its own rules and regulations regarding them.

First-party agencies[link]

Some collection agencies are departments or subsidiaries of the company that owns the original debt. First-party agencies typically get involved earlier in the debt collection process and have a greater incentive to try to maintain a constructive customer relationship.^[3] Because they are a part of the original creditor, first-party agencies may not be subject to legislation which governs third-party collection agencies.

These agencies are called "first-party" because they are part of the first party to the contract (i.e. the creditor). The second party is the consumer (or debtor). Typically, first-party agencies try to collect debts for several months before passing it to a third-party agency or selling the debt and writing off most of its value.^{[citation needed]}

Third party agencies[link]

The term collection agency is usually applied to third-party agencies, called such because they were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications. This however is dependent on the individual service level agreement (SLA) that exists between the creditor and the collection agency. The agency takes a percentage of debts successfully collected; sometimes known in the industry as the "Pot Fee" or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance; very often this fee must be paid by the creditor if they cancel collection efforts before the debt is collected. The collection agency makes money only if money is collected from the debtor (often known as a "No Collection - No Fee" basis). Depending on the type of debt, the age of the account and how many attempts have already been made to collect on it, the fee could range from 10% to 50% (though more typically the fee is 25% to 40%).^[3]

Some debt purchasers who purchase sizable portfolios will utilize a Master Servicer to assist in managing their portfolios (often ranging in thousands of files) across multiple collection agencies. Given the time-sensitive nature of these assets, many in the Accounts Receivable Management (ARM) industry believe there is a competitive advantage in utilizing this technique as it gives the debt purchaser more control and flexibility to maximize collections. Master Servicing fees may range from 4% to 6% of gross collections in addition to collection agency fees.

Some agencies offer a flat fee "pre-collection" or "soft collection" service. The service sends a series of increasingly urgent letters, usually ten days apart, instructing debtors to pay the amount owed directly to the creditor or risk a collection action and negative credit report. Depending on the terms of the SLA, these accounts may revert to "hard collection" status at the agency's regular rates if the debtor does not respond.^{[citation needed]}

In many countries there is legislation to limit harassment and practices deemed unfair, for example limiting the hours during which the agency may telephone the debtor, prohibiting communication of the debt to a third party, prohibiting false, deceptive or misleading representations, and prohibiting threats, as distinct from notice of planned and not illegal steps. . In the United States, consumer third-party agencies are subject to the federal Fair Debt Collection Practices Act of 1977 (FDCPA), is administered by the Federal Trade Commission or FTC.

In the United Kingdom third-party collection agencies that pursue debts regulated by the Consumer Credit Act must hold a Consumer Credit Licence and work within the framework of the 2003 fair debt collection guidance; licences are issued and regulated by the Office of Fair Trading.^[4]

Sale of debts[link]

An increasing number of collection agencies, sometimes referred to as "debt buyers", purchase debts from creditors for a percentage of the value of the debt and pursue the debtor for the full balance, sometimes plus "interest". This prevents a debtor from merely defaulting or forgetting a debt. It also generates immediate revenue, albeit much reduced, for the creditor and reduces the public relations risks involved with defaulted debt collection.^{[5][clarification needed]}

Some states have specific laws regarding debt buying. For example, Kansas does not allow wage garnishments on purchased debt.^{[citation needed]}

Debtors[link]

The person who owes the bill or debt is the debtor. Debtors may fail to pay (default) for various reasons: because of a lack of financial planning or overcommitment on their part; due to an unforeseen eventuality such as the loss of a job or health problems; dispute or disagreement over the debt or what is being billed for; or dishonesty on the part of either the creditor or the debtor. The debtor may be either a person or an entity such as a company. Collection of debts from individual people is subject to much more restrictive rules than enforcement against a business.^[6]

Collection practices[link]

Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt; These practices are highly regulated by The Fair Debt Collection Practices act, State laws to protect consumers, and the Office of Thrift Supervision, the Federal Trade Commission,and State regulatory agencies. Several Federal and State higher courts decisions have outlined several bad practices; Heintz vs. Jenkins,In re: Vinhee, Mcollough vs. Johnson, Rodenburg, Lauinger, Komarova v. Nation Credit Acceptance Inc.

In the US, the FDCPA prohibits calls to the debtor if the call will cost the debtor toll charges (in most other countries recipients of telephone calls are not charged, so this issue does not arise). The FDCPA also establishes what time of day calls can be made at, to whom and where. If a person answers, the call center may track statistics (e.g., the times and days when someone answers) in order to place calls at times when the debtor is more likely to be home; typically this is done by an automated dialing system between the times of 8am and 9pm local standard time. The collector may not use illegal and deceptive practices (for example, threatening the debtor with arrest or impersonating law enforcement). The collector cannot use obscene language and must inform the debtor of the nature of the call (collecting a debt) and their name and the name of the collection company when requested.

International debt collection is a less common and specialised field. Not many companies specialize in this sort of collection as there may be a need to speak different languages and have a knowledge of the different legal systems and laws. International collection calls are often made in a different language than used in the collecting company.

Collection agencies are sometimes allowed to contact individuals other than the debtor, usually in an attempt to locate the debtor but without mentioning the debt. In the US under the FDCPA a collector is permitted to call a neighbor or relative for help in locating the person who owes a debt. Collectors may only ask for "address, home phone number, and place of work." Collectors are "not permitted to discuss [the] debt with anyone other than [the debtor], [their] spouse, or [their] attorney."^[7] Collectors must state their name and must give the name of their employer if the person specifically asks. They may only contact each person once, unless it is believed that the person gave the collector incorrect or incomplete information at the time, but now has complete or updated information.^[6] Collectors may contact a debtor at the workplace unless the collector has been informed the employer prohibits such calls,^[8] in which case the collector must cease all calls to the debtor's workplace immediately.

At times a person with no connection to the debt or the debtor may be contacted by a collector by error. Examples include victims of identity theft and people erroneously targeted due to a similar name. Alternatively, the alleged debtor may dispute that the debt is payable. In such cases the alleged debtor can require that the collector or creditor prove that the debt is payable—in no jurisdiction does a debt exist merely because a collector says so. In the United States under the FDCPA, anyone has the right for any reason to request written validation of the debt or to demand the collector cease communication.^[9]

Relatives of deceased people do not necessarily themselves have to pay the debts of the deceased,^[10] but debts must be paid by the deceased person's estate.

Collection account[link]

Collection account is the term used to describe a person's loan or debt which has been submitted to a collection agency through a creditor.^[11] The term is not used on debts with only original creditors.

Credit record[link]

Defaulted debts are placed by an alleged debt owner on a person's credit record, and usually remain for several years, particularly if the debt has been referred to collection agencies or subject to court judgments. This may not necessarily be properly authenticated or checked to be accurate.^[12] If an error does occur the Credit reporting agencies, and Credit information suppliers have a 21 day safe harbor period to correct the error and the safe harbor period can be used as an affirmative defense in a lawsuit.^[13].^[14]

United States[link]

In the US this usually happens only when the account has reached Charge Off status from the original creditor. Not every account placed in collections is necessarily a "credit" account and subject to one of the three major credit bureaus reporting systems. If a debtor pays off a collection account, the item will be marked "Paid", but not removed from credit reports.^[15]

If a debt is disputed it can only appear as disputed on the alleged debtor's credit report.^{[citation needed]}

Regulation of collection agencies[link]

Canada[link]

In Canada regulation is provided by the province or territory in which they operate. The law is typically called the Collection Agencies Act and usually affords a government ministry power to make regulations as needed.^[16] Regulations include calling times, frequency of calls and requirements for mailing correspondence prior making telephone contact.^[17] Most debts in Ontario and Alberta are subject to a limitation period of two years. Most other provinces the limitation period is 6 years. After the corresponding (two or six, depending on province) anniversary of the last formal intention to pay the debt, the collection agency nor anyone else has legal authority to collect it.^[18] Credit bureaus will still retain the debt and the collection on your credit file for 6–7 years depending on province. Although the collection agency can continue to collect or attempt to collect the debt, they cannot garnish or place a lien on the debtor past the limitation period unless the court upholds a new date of last activity on the account based on other factors. In Manitoba the governing document is the Manitoba Consumer Protection Act. Complaints regarding violations of the Act should be directed to the Manitoba Consumer Protection Board who will either mediate or enforce the act when it is broken.

For further information, see the Ontario regulations^[19] section on prohibited practices.

Province-specific statutes:^[20]

• Alberta - Collection Practices Act
• British Columbia - Business Practices and Consumer Protection Act
• Manitoba - Consumer Protection Act
• New Brunswick - Collection Agencies Act
• Newfoundland and Labrador - Collections Act
• Nova Scotia - Collection Agencies Act
• Ontario - Collection Agencies Act and Debt Collectors Act
• Prince Edward Island - Collection Agencies Act
• Quebec - Act Respecting the Collection of Certain Debts
• Saskatchewan - Collection Agents Act

United Kingdom[link]

In the UK, debt collection agencies are licensed and regulated by the Office of Fair Trading.^[21] The OFT sets guidelines on how debt collection agencies can operate and lists examples of unfair practices.^[22] These guidelines are not law, but do represent a summary and interpretation of various legal areas. Compliance with these guidelines is also used as a test of whether the agency is considered fit to hold a credit licence.

Examples of unfair practices include misrepresenting enforcement powers (e.g. claiming that property may be seized), falsely claiming to be acting in an official capacity, harassment, claiming unenforceable or excessive charges, misrepresenting the legal position to a debtor, and falsely claiming that a court judgement has been obtained when it has not. The legal basis for these practices comes from section 40^[23] of the Administration of Justice Act 1970.

Collection agencies and their debt collectors in the UK are not the same as court-appointed bailiffs.

United States of America[link]

The Federal Trade Commission is the primary federal regulator of collection agencies, although the Bureau of Consumer Financial Protection—created in 2010 and housed within the Federal Reserve—will also have regulatory power over collection agencies.^[24] Many States and a few cities require collection agencies be licensed and/or bonded. In addition, many States have laws regulating debt collection, to which agencies must adhere (see Fair debt collection).

The Fair Debt Collection Practices Act is the primary federal law governing debt collection practices. The FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that violates the Act. Alternatively, the Federal Trade Commission or the state attorney general may take action against a noncompliant collection agency, including issuing fines, ordering damages, restricting its operations or even closing it down (see, e.g. CAMCO).^[25]

The FDCPA specifies that if a state law is more restrictive than the federal law, the state law will supersede the federal portion of the act. Thus, the more restrictive state laws will apply to any agency that is located in that state or makes calls to debtors inside such a state.

In addition to state and federal laws, a majority of U.S. collection agencies belong to trade group ACA International and agree to abide by the association's code of ethics as a condition of membership. ACA's standards of conduct require its members to treat consumers with dignity and respect, and to appoint an officer with sufficient authority to handle consumer complaints. Consumers may also resolve disputes brought against a collection agency who is a member of ACA through ACA's consumer complaint resolution program.

See also[link]

• Debtors' prison
• Distraint or distress
• Tax refund interception
• Predictive analytics

References[link]

External links[link]

• National Association of Collection Agents® (NACA®).
• Fair Debt Collection Practices Act - Federal Trade Commission.
• Bill and Account Collectors - U.S. Department of Labor, Bureau of Labor Statistics.
• ACA International, the Association of Credit and Collection Professionals.
• CLLA, The Commercial Law League of America.
• State Collection Laws.
• insideARM - Trade publication for the debt collection industry.