How to Send a Debt to a Collection Agency

When internal efforts to recover overdue payments have not been successful, creditors may consider sending a debt to a collection agency. This process involves a third-party agency taking over communication and negotiation with the debtor on behalf of the original creditor. Collection agencies specialize in recovering delinquent accounts, helping to reclaim funds that might otherwise be lost. Engaging such an agency can help businesses manage their accounts receivable.

Assessing Debt for Collection

Before engaging a collection agency, a thorough internal evaluation of the outstanding debt is necessary. This assessment helps determine if a debt is suitable for external collection efforts. The age of the debt is important, as older debts generally become more challenging to collect. The statute of limitations for debt collection typically ranges from three to six years in many states, though it varies by debt type and jurisdiction. While a debt collector cannot legally sue for a time-barred debt, the debt itself does not disappear and can still appear on a credit report for up to seven years from the date of the first delinquency.

The history of non-payment also provides insight into the debtor’s behavior and the likelihood of successful recovery. Creditors should document all prior attempts made to collect the debt, including invoices, reminder notices, and communication records. The amount owed is another consideration; while agencies handle debts of various sizes, smaller balances might incur higher percentage fees. Debts less than 90 days past due are generally more recoverable.

Gathering Essential Information

To maximize a collection agency’s effectiveness, creditors must compile comprehensive information and documentation related to the debt. This includes the debtor’s full legal name, any known aliases, and current contact details such as addresses, phone numbers, and email addresses. Providing a Social Security Number or date of birth can also aid the agency in accurately identifying and locating the debtor.

The exact amount of the debt, including the principal balance and any agreed-upon interest or fees, is necessary. Creditors should also provide the original date the debt was incurred and a detailed, itemized breakdown of the goods or services provided. Copies of all relevant supporting documents are crucial, including contracts, invoices, signed agreements, service orders, returned checks, promissory notes, and communication logs. Any payment history or partial payments made by the debtor should also be documented, as these records substantiate the debt and can be used as evidence if disputed.

Selecting and Engaging a Collection Agency

Choosing a suitable collection agency involves considering several factors to align with a creditor’s specific needs. Agencies often specialize in certain industries or types of debt, and their reputation for ethical practices and compliance with regulations is important. Licensing requirements for collection agencies vary significantly by state, with many requiring a license and/or bond to operate legally. Some municipalities may also have additional licensing requirements.

Agencies typically operate on a contingency-based fee structure, charging a percentage of the amount successfully collected. These contingency fees commonly range from 20% to 35% of the collected debt, and can be higher for older or smaller debts. Some agencies may offer flat-fee models for initial services or smaller accounts. Once an agency is selected, the creditor provides the debt information and reviews the agency’s client agreement. This agreement outlines the terms of service, including the fee structure and reporting protocols.

Understanding the Collection Process

After a debt is placed with a collection agency, the agency begins its process to recover funds. This involves initial contact attempts through various communication channels, such as formal demand letters, phone calls, and electronic communications. Agencies employ skip tracing techniques to locate debtors who have moved or changed their contact information. Skip tracing involves searching public records, databases, and sometimes social media to find current whereabouts.

Agencies regularly report on their progress and any payments received. When payments are collected, the agency remits the recovered funds to the creditor, deducting their agreed-upon fee. Collection agencies can also report delinquent accounts to credit bureaus, which can significantly impact a debtor’s credit score and remain on their credit report for up to seven years from the date of the first delinquency. Agencies that report to credit bureaus must comply with regulations like the Fair Credit Reporting Act (FCRA). In some cases, agencies may recommend legal action for debt recovery, typically reserved for larger or more complex accounts, involving additional legal processes.