How Do Collection Agencies Work?

by Bill on May 2, 2012

Who would want to own a collection agency? For that matter, who would want to be a bill collector? Believe it or not, there is some money in the debt collecting business. Its not a great way to make money, but it is a viable industry due to our inability to handle finances.

How Do Collection Agents Get Your Account?

Collection agencies come in two types – in-house collections and third-party collections. Any initial attempts to collect outstanding debt will likely be from in-house collection agents. If they fail, then a third-party collection agent is brought in.

The in-house collection agent is usually the billing department for a credit agent, large firm or business that offered time payments such as “buy here pay here”. The business uses this type of agent to keep costs low while collecting outstanding debts.

The third-party agencies are also independent collection agents not tied into the business that hires them to collect outstanding debts. These agencies are the ones you hear about most often. NCO Financial Systems and AES are two of the bigger national collection agencies. They work on a percentage or purchase outstanding debt that has been charged-off from the original creditor.

How Does the Collection Agency Make Money Off My Debt?

Collection agents make money through a percentage of collected outstanding debt or they buy outstanding debt for pennies on the dollar, then try collecting the full debt. Either way, if you pay off the full amount owed, they make money. The debt collector makes roughly twenty-five to fifty percent of the full debt as profit.

What if the bill collector can’t collect the debt? They sell it off to another bill collector at the price they paid plus some cost for overhead, then go on to find more successful accounts. This is how you wind up with three or more bill collectors on your past due bills. Meanwhile the original creditor has long written off your account as a loss and you are no longer a problem to them.

How Collection Agencies Collect Debts?

Collection agents use one or a combination of four methods to collect a debt – they can send a letter, visit you in person, report the debt to credit reporting bureaus or sue you for the money. The last one of the four is also the least used due to the cost of litigation and the time consumed. Most often they will send letters, call and visit (usually in that order). They will often create a stream of letters and/or phone calls pushing for results; if this tactic doesn’t work, they threaten a negative credit report on your credit file.

Most of the letters you get will be form letters. Most of the phone calls will be pre-recorded messages. This saves time and money on employees; thus creating efficient collection efforts and taking on the maximum number of accounts.

Collection agents also make use of flexible payment plans to get an agreement in writing. You will see some debt collectors offer discounts up to half of the amount owed to settle the account; they still make something if not break even for the debt so the discount is no loss to them. These options usually appear on very old, or very large debt to cover the agencies cost and clear dated accounts.


Here’s something from the resource room to help you further:


Credit Collection FAQ

William Swan, writer

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