How Does a Collection Agency Work?

Introduction

Collection agencies find their workloads to be cyclical. When the economy is booming, collection agencies have fewer clients in need of their services. However, when the economy takes a turn for the worse, collection agencies suddenly find themselves inundated with new business and clients.

Locating Clients

Collection agencies solicit work from businesses with large outstanding unpaid balances. After exhausting all attempts to collect on the outstanding debts, frustrated business owners turn their collection problems over to the third party debt collection agencies. The collection agency takes on the responsibility of collecting the outstanding debts. Collection agencies employ tried and proven practices which give them a higher success rate at securing past due and unpaid balances than their clients.

Earning Money by Collecting Debts

Debt collection agencies make money on a contingency basis. Their income is directly related to the amount of outstanding debt cases from which they actually collect money. There are several ways in which a debt collection agency can earn money. Some agencies purchase the outstanding debt from their client. In other words, they pay the client a small percentage of what the outstanding debt is worth. The client, who previously faced a total write off as bad debt, agrees to the arrangement because getting something is better than nothing. The debt collection agency, the new owner of the outstanding debt, goes about collecting the outstanding balances. In calculating how much to pay a client for the bad debt, the collection agency takes into consideration its success rate in collecting outstanding debt versus the amount the agency is willing to pay for it. The difference between what the agency pays for the debt and the amount it collects for the debt is the collection agency's profit. Other agencies negotiate a commission percentage. The client retains ownership of the bad debt, but the collection agency receives a percentage of each outstanding balance collected.

Varying Degrees of Collection

The debt collection agency has several degrees of debt collection. It starts with a friendly reminder and then increase the intensity and frequency of the collection efforts. Collection agencies are mindful, however, not to violate the law. They are Federally governed by the Fair Credit Reporting Act and locally governed by the laws existing in the state, city and locality of the area in which they operate.