Often a creditor will choose to either hire a collection agency to help him collect on his outstanding debts or, in some cases, sell his debt to the agency outright. In such cases, the agency has all of the rights that were given to the original creditor. This means that the agency can charge any interest called for in the debt contract but cannot charge any additional interest, such as for the costs it incurs.
Collection Agencies
A collection agency legally enjoys the exact same rights as the creditor to whom a debtor owes money. In effect, a collection agency is acting as the creditor's proxy or, if it has bought the debt, as the creditor himself. The debtor must merely pay his money to a different party: the terms of the original contract or agreement from which the debt stems, however, remain unchanged.
Debt Contracts
A debt contract is the contract that a buyer and a seller agree to when a debt is issued. This contract is usually written, but in some cases it may be agreed to verbally. In either case, the buyer is legally obligated to pay back the money according to the contract's terms. This contract will spell out if the borrower must pay back interest on the loan, in addition to the principal.
Interest Payments
If a contract does call for interest payments, it will spell out exactly how much interest is owed. A collection agency is legally allowed to charge the borrower any interest called for in the contract. However, an agency cannot arbitrarily add more interest if the debt is not paid. For example, even if a debt is a year overdue, an agency cannot charge interest for this default unless the contract calls for it.
Fair Debt Collection Practices
Creditors who do attempt to charge interest not called for in the original contract are in violation of the Fair Debt Collection Practices Act. This act forbids creditors from passing on costs to debtors. The only way a creditor could charge an additional fee to the borrower would be by suing the borrower in court and receiving an award from a judge for damages in excess of the amount called for in the contract.
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