A collection agency is a business that pursues payments on debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Some agencies, sometimes referred to as "debt buyers", purchase debts from creditors for a fraction of the value of the debt and pursue the debtor for the full balance. Creditors typically send debts to a collection agency in order to remove them from their accounts receivable records; the difference between the amount collected and the full value of the debt is then written off as a loss.
In many countries, collection agencies are governed by laws that prohibit certain abusive practices. Failure to adhere to such laws may result in lawsuits or government regulatory actions.
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, most creditors will retain accounts with first party agencies for a period of around 6 months before the debt is written off and passed to a Third Party Agency (see below).
Some agencies offer a flat fee, typically $10.00, "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.
In the United States, consumer third-party agencies are subject to the Fair Debt Collection Practices Act of 1977 (FDCPA). This federal law is administered by the Federal Trade Commission or FTC. This act limits the hours during which the agency may call the debtor. It also prohibits false, deceptive or misleading representations, and prohibits the agency from making threats of actions the agency cannot lawfully or does not intend to take.
In the United Kingdom, although no similar law exists, all third party collection agencies must hold a consumer credit license under the Consumer Credit Act 1974 in order to carry out their business. Licenses are issued and regulated by the Office of Fair Trading a government body which protects consumers from unscrupulous traders. In order to retain their license third party agencies must work within the framework outlined within the 2003 fair debt collection guidance.
In commercial collection cases, the debtor is a business. This includes sole proprietors, corporations, partnerships or individuals that incurred the debt for business purposes.
The modern business model is the primary reason for the many complaints brought against collection agencies . Debt collectors who work on commission may be highly motivated to convince debtors to pay the debt, often to the point that they sound threatening to the debtors. Most people are accustomed to being treated with a certain amount of customer service and often complain that they do not receive that treatment from debt collectors.
Successful collection calls also rely on the skill and understanding of the collector making the call. Quite often a collector only has the first initial phone call to establish a rapport with the debtor and to help work out a solution to the debt owed. This may take the form of a payment plan or a discount on the principal amount that is owed.
In international debt collection cases the collection calls are often made in a foreign language. This is useful if the debtor's knowledge of English is limited and it is quite often this lack of English that is used as a debtor excuse for non-payment.
Collection agencies may contact individuals other than the debtor, with important limitations. Under the FDCPA, a collector is permitted to call a neighbor or relative for help in locating the person who owes a debt, as long as there is no communication about the debt. Collectors must state their name and must give the name of their employer if the person specifically asks. A collector may 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.
Collectors may contact a debtor at the workplace unless the collector has been informed the employer prohibits such calls.
At times a person with no connection to the debt or the debtor may be contacted by a collector in error. Examples include victims of identity theft, people erroneously targeted due to a similar name, or people who otherwise dispute the validity of the debt. In the United States under the FDCPA, anyone has the right for any reason to request, in writing, validation of the debt or to demand the collector cease communication.
The collection account normally appears on the credit report of a person (debtor) who has had one or more accounts referred to collection agencies, within the last seven years. Collection fees can range from $500 to $50 000. The name of the collection agency, and the amount of money a person owes, will be listed in the report. Also, in some cases, the agency's contact information is listed. If a debtor pays off a collection account, the item will not be removed from the credit reports - it will simply be marked "Paid."
First, the lawsuit is filed with the court. Then, the debtor must be notified of the lawsuit by having the court documents served upon him or her, usually in person. The person presenting the documents to the debtor is usually a process server and usually works for a separate process service company, to avoid allegations that service was not done correctly. Depending on local laws, process may also be served by a local Sheriff’s Deputy.
Once the debtor is served, he or she must take some action to respond to the lawsuit, though the specific type of response depends on individual state law. If there is no response, the collection attorney will usually request that the court grant a default. A default judgment is one that rules in favor of the collection attorney because the debtor did not respond to the legal notice. Default judgment is almost always granted if the debtor does not respond to the lawsuit.
Once the collection agency's attorney has obtained judgment, he is empowered to take action to obtain the money from the debtor. A number of options are open, depending on the state the debtor is in and the status of the debtor's employment and assets.
Typically, the most effective method to collect on a legal judgment is to garnish a debtor's wages. The court will send or serve an order of garnishment to the employer. This requires the employer to deduct a certain percentage of the debtor's paycheck and forward it to the court, which in turn forwards the money to the collection attorney. Under Federal law, the amount of the garnishment cannot exceed 25% of disposable earnings or the amount of earnings exceed 30 times the minimum wage (). Some states have additional restrictions on garnishment as well. However, depending on the state in which the debtor resides, those who are earning less than $20,000.00 per year generally cannot be garnished by third-party collectors. Also, debtors who are already being garnished, especially in cases of child support, cannot have additional wages garnished. However, not every state permits wage garnishment. At present four U.S. states — North Carolina, Pennsylvania, South Carolina and Texas — do not allow wage garnishment at all except for debts related to taxes, child support, federally guaranteed student loans, and court-ordered fines or restitution for a crime the debtor committed. Several other states observe maximum thresholds that are lower than the 25 percent maximum provided by federal law. States may also prohibit garnishment altogether in certain circumstances. For example, in Florida the wages of a person who provides more than half the support for a child or other dependent are exempt from garnishment altogether (though this exemption is subject to waiver).
A creditor who has obtained a judgment can also execute against a debtor's assets, such as automobiles, bank accounts, and real estate. Every state has specific restrictions and procedures regarding how and what may be executed against. These are often called "execution exemptions." When an asset (other than money) is executed against, it is usually sold, in many cases by a public official such as a sheriff. The proceeds, minus fees, are then given to the judgment creditor. Any excess proceeds are to be returned to the judgment debtor. Judgment creditors may also place liens on certain bonds the debtor may have with the government, such as the bond that contractors are required to have when operating a construction company.
Specific laws and procedures can vary considerably from state to state. Most states have Statute of Limitations laws that limit the length of time from the commencement of delinquency in which a collection agency can file suit.
The Fair Debt Collection Practices Act is the primary United State Federal law governing debt collection practices. The FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that violates the Act. Alternately, 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).
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.
For further information, see the Ontario regulations section on prohibited practices.
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 judgment has been obtained when it has not.
Collection agencies in the UK should not be confused with court-appointed bailiffs.