Major creditors, such as hospitals, banks and credit card companies, juggle a multitude of responsibilities. Because most creditors are for-profit companies, its imperative that they manage consumer accounts as efficiently as possible with as little effort as possible. Creditors possess neither the time nor the inclination to chase debtors around indefinitely demanding payment. When a creditor's collection efforts fail, it has the option to hire collection agencies for assistance in recovering non-performing accounts.
Time Frame
Creditors do not typically turn delinquent accounts over to collection agencies immediately after the consumer misses a payment. The creditor does not want to share the proceeds from the debt with another company unless it has no other option. The length of time that a creditor will attempt to recover an account before sending it to collections varies depending on the industry. Banks and credit card companies, for example, often wait a full six months before charging off debts while hospitals charge off unpaid accounts sooner.
Charging Off Debt
After the allotted time frame for collection passes, the creditor charges off the debt by purging the unpaid account from its accounting ledger. Doing so allows the creditor to claim the bad debt as a business loss for tax purposes. While the term "charge-off" often refers to credit card write-offs, other creditors that purge their business records on account of nonpayment also charge off debts.
In-House Collections
Major creditors sometimes have "in-house" collection agencies that collect debt on their behalf. An in-house agency is merely a collection department that operates as the creditor's private collection agency, contacting debtors about their delinquent balances. A creditor does not need to draw up a contract with its in-house collection agency. It merely transfers the debt to the proper department for collection.
Third Party Contract
Creditors who do not possess in-house collection departments or whose collection departments could not collect the debt will hire an outside agency to collect overdue debts consumers owe. Through a third party contract, the collection agency agrees to collect the debt on behalf of the creditor in exchange for a portion of the proceeds. The original creditor still technically owns the debt and can still accept payment from the debtor if he offers it.
Third Party Sale
When all other collection efforts fail, a creditor sells its non-performing accounts outright to a third-party collection agency. Collection agencies that purchase debt are known as "debt buyers" and generally pay the original creditor much less for the debt than it would receive if it recovered the debt on its own or paid another collection agency a commission for doing so. After selling a debt, the creditor cannot accept payment from the debtor should he prefer to pay off his original lender rather than a debt collector.
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