The Good, Bad and the Ugly in Debt collection Business

In commercial collection industry, the debtor is a potential business.

Anybody might need to borrow money for the purpose of business. Any amount of loan is as important as the other. In fact small borrowers form 30% of annual turn over in the financing industry.

The borrowers include:

• Individuals
• Sole proprietors
• Partnerships
• Corporations
Let us look at who is who in the financing industry.

First party agency

A first party agency is the department/subsidiary/the company itself that owns the debt it has financed. They are part of the first party to the contract/the original financier and is called the first party and are not subject to the fair debt collection practices act that police the third party collectors/ agencies. The employees from this section are responsible for

• Recovering debt from the second party agency/Debtor
• Maintaining cordiality in customer relations

The second party/Debtor

When business needs money, you might approach a financing institution or a financier for help. You will be eligible for bank loans only if you show collaterals to assure the banks that you will promptly repay what you borrow. To ensure a positive cash flow, the financing companies often hire debt collection agency/collection agents on their behalf after the stipulated 90 days, to recover the loans according to the contract. Many a lender, like the credit card or the insurance company go after unpaid bills after only 60 days or sometimes even earlier. If a loan collection process is more expensive than the amount of loan itself the financing banks/institutions may not be willing to try very hard to collect those bills. They might write off these loans. With a tight cash flow and slow business, companies are getting tough with the bad debts as a means to supply cash to stay afloat even it if means getting a fraction of the original loan.

Third party agencies

Creditors retain accounts of their first party agencies for a period of around 6 months. Then they write it off and pass it onto a Third Party Agency/Collection agency.

FAQs about Collection agency/the Third-party agencies

• They are not a party to the original contract
• They are assigned accounts by the creditors directly for a contingency-fee
• They may initially cost nothing to the creditor/merchant, except for the cost of communications
• They charge the creditors depending on the individual service level agreement /SLA
• They charge a percentage of the debt upon successful collection known as the Pot Fee/No Collection - No Fee terms ranging from 10% to 35%
• They are entitled to this fee should the creditor decide against the collection before its complete recovery
• Some may offer a flat fee, around $10.00, as a pre-collection/soft collection service
They start with sending a series of increasingly urgent letters, each ten days apart, instructing the debtors to
• Pay the amount owed directly to the creditor
• Risk a collection action and negative credit report in case of failure to oblige

Should the debtor fail to respond, these accounts may revert to hard collection status based on the SLA agreed upon.
Despite the ugly face of the collection industry, having a debt collection agency on your side, from a business point of view is an asset in itself.

If you are a soft target for any loan shark/ zombie/junk debt collector there are laws that help you chase them away. They might even have to pay you in damages besides paying for your attorney.

Victor Kevin has published a number of articles, both online and off-line. Many are about Debt collectors and collection harassment. He is currently expanding his Internet business ventures.