Can a Collection Agency Charge the Debtor a Fee?

When a creditor is seeking to collect a large, delinquent debt from a debtor, the company may choose to hire a collection agency to secure payment of the outstanding sum. Collection agencies specialize in collecting payment from debtors using a number of different legal methods, ranging from writing letters to seizing bank accounts. However, unless the debtor's loan contract specifically allows for it, a collection agency cannot charge the debtor a fee for its services.

Collection Agency Compensation

When hired by creditors, collection agencies are nearly always paid on commission. Generally, these agencies get paid a percentage of the debt that they collect. This gives them motivation to collect as much on the debt as they can. In some cases, a collection agency will purchase a debt outright. In such cases, the agencies will be compensated by the total amount of money that they are able to extract the delinquent debtors.

Federal Law

According to the federal Fair Debt Collection Practices Act, which applies to all collection agencies in the United States, a creditor cannot pass on the cost of collecting on the debt to the debtor unless the loan contract specifically says this is an option. So, this means that a collection agency can only be compensated by the creditor who holds title to the loan, and cannot charge debtors either a flat fee or additional interest on the loan.

Exceptions

The one exception to this rule is if a contract allows the creditor or a collection agency working for him to charge the debtor additional money in the event that the account goes into collections. In such a case, state law may still regulate the amount that the creditor can charge. For example, the state may cap the size of the fee or the rate of interest that a creditor can charge for a late debt.

Considerations

While a collection agency is not allowed to tack on a fee to the debtor, there are certain instances in which a debtor may be responsible for fees associated with the collection of a debt. For example, under the terms of most car loans, the lender is not only allowed to repossess the car from the borrower if he goes delinquent, but he can also charge the borrower fees spend in repossessing and reselling the car.