People can incur debts in a number of different ways, such as taking out loans or buying goods and services on credit. When a person or company is owed money by a debtor, he may not always be well equipped to collect on a debt. Generally, a person who is owed money can hire a collection agency to collect payment on the debt.
Debt Agreement
The only requirement for a debt to be collected is for the debt to be legal. In order for a debt to be legal, it must have been secured in some form of debt agreement. Many debt agreements are written down in the form of a contract, but in other cases the agreement will be made verbally. As long as both parties made this agreement, then the debt can be collected by the creditor or by her proxy, such as a collection agency.
Collection Agency
A collection agency acts as a representative of the person who is owed money. A collection agency is endowed with the same rights that the creditor is. While collection agencies are generally used by businesses to collect debts from clients, anyone who is owed a debt and who can afford a collection agency is legally allowed to hire one. The only exception would be if the debt contract specifically forbids the creditor from doing so.
Compensation
Generally, collection agencies are hired on commission. This means that the collection agency receives a percentage of the amount it successfully collects from the debtor. In some cases, a collection agency will simply buy a debt from a creditor. In order to hire a collection agency, a person's debt must be large enough to make it financially worthwhile for the agency, or the creditor must be prepared to pay a flat fee for the agency's services. These fees can range greatly. According to Buyer Zone, collection agencies will commonly charge $10 per month to send notices of collection to up to 4 accounts.
Fair Debt Collection Practices Act
Once a person hires a collection agency to collect a debt, the agency must work within the confines of the Fair Debt Collection Practices Act. This act limits the actions that the agency can take when trying to convince the debtor to pay the money back. A collection agency -- and, in some cases, its client -- may face penalties for violation of this act.
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