What is Debt Collection

What is Debt Collection?

Debt collection is the process of obtaining debts owed by debtors to the creditors that have become arrears. Most of the time, the creditor does not collect the debt himself, but uses the services of a debt collection agency that can be both a first party group or a third party. 

The business that collects the payments on debts that are owed by businesses or individuals is known as a debt collection agency. Most of the agencies act like the creditor’s agents and pocket a portion of the debt collected as their service charges. Also, certain agencies known as debt buyers, give the creditor a portion of the debt owed and then go on to obtain the full amount from the debtor. In the creditor’s receivable records, the difference between the actual value of the debt and the debt money received is written off in the books as a loss.

In most countries, debt collection agencies come under strict laws that do not allow abusive practices and a failure to standby these laws can result in government regulatory actions and lawsuits.

First party agencies:

First party debt collection agencies are departments of the creditor company. These agencies generally become involved earlier in the process of collecting debts and have a greater incentive to ensure a constructive and harmonious customer relationship. Since they come under the company, they are not under the various laws that govern third party agencies.

Such agencies are known as “first party” because according to the contract, they come under the contract’s first party; that is the creditor. The debtor becomes the second party.

Generally, companies keep their accounts with their own debt collection departments for 6 months before it is given to a third party debt collection agency and is written off.

Third party agencies:

Third party agencies generally have the name “collection agency” applied to them because they are not one of the original contract’s parties. An agency gets these accounts on a basis of contingency fee, which actually ensures minimal costs to creditor. However, this basis depends on the SLA or service level agreement that is drafted between the collection agency and the creditor. If a debt is successfully collected, a portion of the total debt is pocketed by the agency and this is known as the “Pot Fee”. Generally, the pot fee percentage is between 15% and 35%. Other agencies ask for a flat fee and this is known as a soft collection or pre collection service. Urgent letters are sent to the debtors asking them to pay up and they become increasingly urgent as days progress warning negative credit report and taking collection action. 

The Law: