What are collection companies?
Table of contents
A collection company is hired to collect outstanding debts, normally operating for a commission percentage/fee of the amount taken from the debtor. In some countries, e.g. the GSA region (Germany, Switzerland, Austria), it is possible that a debt collection company will not charge its clients a fee for the pre-legal procedure, and sometimes even the legal actions can be free of charge. Debt recovery agencies are regulated by different federal laws and collection agencies acts, depending of the country they operate in, e.g. FDCPA for USA (Fair Debt Collection Practices Act); CAADCA for Ontario, Canada (Collection Agencies Act and Debt Collectors Act); the Fair Trading Act 1973 for UK regulating all sides of the collection process- subjects of debt, creditors and collection agencies; etc. Collection company- categories Collection companies
Types of collection companies
First-party collection company
Such agencies operate within the creditor’s company, which has debtors. The name derives from the fact that this type debt collection agency is actually employed by the creditor who is the first party. Therefore a first-party agency is also connected to the signed contract between the creditor and the debtor. The recovery agents are often employees in the same organisation- subsidiaries or even direct departments (e.g. finance/accounts receivable, etc.) of the organisation that owes the debt; their results are connected with personal performance. First-party debt collectors start the collection process earlier and are more motivated to collect the amount. It costs less for the company but might not always be as efficient as hiring a professional recover company. Creditors usually use first-party debt collectors, if the debt is recent (up to 6 months old). Depending on the country, their actions may or may not be regulated by the same legislation and law that subordinates the third-party debt recovery company.
Third-party debt recovery agency
Usually the debt collection process is performed by a third-party recovery company (commonly a private debt collection agency). Such agency is not part of the creditor’s internal collection departments, but is separate from the original lender’s business. DCAs (Debt Collection Agencies) collect default amounts from bad debts on behalf of the original creditor. Using a third-party credit collector gives the creditor the opportunity to focus on other activities within his company and not on collecting bad debts. The collection agency charges its clients a commission fee. This is the percentage taken from the full amount and received upon successful collection (the so-called “No collection - no fee” tenet). The DCA (Debt collection agency) can demand payment from its clients OR from their debtors instead. In the second case, the services will be free of charge for the creditor. The amount they receive as a commission fee is a fraction of the total debt amount. The name origins from the fact that this party is not part of the business relations between the creditor and the debtor and is not involved and bound by their contract.
Debt buyers have received their name from their own business model- they buy delinquent receivables and defaulted payments, which are denoted as charge-offs/written-off debts by the original lender/creditor. A charge-off debt, also known as a written-off debt is an amount of a debt that is highly unlikely to be collected. This doesn’t mean that the debt is remitted, but only that this amount is not considered as an asset for the creditor’s company anymore.
A debt buyer can represent a recovery company, a private organisation or a credit collection law agency; and therefore he is also part of the debt collection process. It is a common practice when the creditor fails in collecting defaulted accounts, the same subject sells the bad debts to debt buyers who pay the creditor a percentage of the total debt amount. When the debt is bought, the debt buyer becomes the new owner and the debtor can no longer contact the original debt creditor. From this moment onwards, the subject is obliged to pay the amount due to the debt buyer and not to the original creditor. The debt buying business becomes more and more popular among the debt collection companies and today it represents a whole separate industry.
Operating locations of a debt collection company
A collection company can operate either:
- Within the country it is based or
- Internationally. Some debt collection companies offer worldwide collection services. Such companies focus mainly on Internet clients selling products or services in more than one country. The call centres are usually polylingual; they collect the debts as easy as the other collection companies in this branch. The collection process of the international DCA’s is as successful as the debt collection of recovery agencies, which operate in only one country.
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