What is a collection agency?
Simply put, a collection agency is an organization that offers services to lenders and creditors so that they can collect overdue or defaulted amounts. Usually, a creditor hires a collection agency after making several unsuccessful attempts to collect a debt.
How does debt collection work?
When someone fails to pay his bills or defaults on a scheduled loan, the creditor usually takes the following steps against him. First, he may report the default to a credit bureau. This will affect the borrower’s credit history. Within three to six months of default, the creditor may turn the debt over to a collection agency.
At that point, two things can happen. The borrower can make payments in response to the collection agency’s efforts, or he can simply continue to ignore the debt. When the person pays, either the entire debt or part of what is owed on a payment plan, the collection agency will receive a percentage of the funds.
If the individual still does not make any kind of payment for their overdue debt, the collection agency (Dutch: incassobureau) may change their credit report to indicate that they are in collection status. This action will result in a decrease in the borrower’s credit score. The change in credit score will vary depending on several factors, including the current score and the size of the debt. An account listed as being in collection status can remain on a credit report for up to seven years.
To obtain past due amounts, collection agencies may try several strategies, including:
- Make phone calls to a person’s home, cell and office phones.
- Mail notices of arrears and collection letters
- Contacting the debtor’s family, friends and neighbors to confirm the person’s contact information.
- Appearing at the debtor’s home.
What are the benefits of using a collection agency?
There are numerous reasons to use a collection agency when you are failing to collect past due debts from your customers. As a business owner, you don’t have time to track down debtors and keep up with phone calls when bills go unpaid. Although some companies have in-house collection agencies, it may be time to go to an outside collection agency when debts become overwhelming.
Benefits of using a collection agency include the following:
- Legal protection: Unless you are well versed in the laws of debt collection, consider a collection agency whose expertise will protect you from unwanted lawsuits. Agencies are aware of both federal and state laws regarding debt collection practices. By using a debt collection service, you eliminate the risk of legal repercussions from attempting to collect a debt yourself.
- Documentation. Collection agencies document every step of the collection process. Should you decide to sue the debtor, you will have thorough documentation of the collection agency’s attempts to collect the debt. Also, if you claim the bad debt as a tax deduction, you will need documentation for your taxes. The IRS will want to know that you have exhausted all options before writing off the debt.
- Successful collection. Collection agencies have experience and a higher success rate in collecting past due debts. Hiring a collection service increases your chances of collecting funds and allows you to focus on your business instead of chasing debtors.
- Faster payment. Not only are people more likely to pay when approached by a collection agency, they also pay faster than if you keep approaching them. So using a collection agency (Dutch: incassobureau inschakelen) will ensure faster payments on your outstanding invoices. When people realize that their credit score may be affected, they tend to respond immediately to avoid a dip in their credit record.