Is your company having trouble collecting debts from your clients? Do you worry that you’ll never see that money owed to you? Perhaps you’ve been considering hiring a collection service. If so, it’s wise to fully understand how debt collectors work and how collection agency fees are set up.

When dealing with a debt collection agency, it’s helpful to understand the agency’s perspective, such as what motivates them and what their incentives are. Taking the time to fully grasp the debt collection process can help make the whole experience go smoothly.

The Debt Collection Process

Debt collection agencies are often hired by companies to collect their delinquent invoices. They are essentially a middleman, responsible for contacting debtors who are at least 60 days delinquent, retrieving the past due funds, and remitting the debt to the creditor. Debt collection agency fees, which are charged to the creditor, are typically between 25% and 50% of the amount collected from the debtor.

Agencies can be hired by a variety of companies and can attempt to retrieve all types of debts, such as:

• Credit card charges
• Medical bills
• Auto loans
• Personal loans
• Business loans
• Student loans
• Utility bills
• Cell phone bills

Companies can reach out to debt collection agencies for almost any type of delinquent debt in the hopes that the agency can retrieve the funds. Most agencies focus on specific types of debt and all should limit their activity to debts that are within the statute of limitations for that state.

To retrieve the funds, debt collectors may negotiate settlements that are smaller than the original debt. When debtors refuse to pay, a debt collection agency may refer the case to a lawyer, who can file a suit against that individual in an effort to collect.

How Debt Collectors Operate

Debt collectors reach out to delinquent borrowers through letters and phone calls. If the contact information that they have is incorrect, they’ll research online or hire private investigators to locate the individual. They can also try to locate the debtor by searching for his assets, like bank accounts or brokerage accounts, to see if the person is capable of repaying the debt. They may also report delinquent accounts to credit bureaus in order to damage the individual’s credit score in an attempt to get them to commit to paying off their debt.

Debt collection agencies can take the individual to court in order to obtain a judgment against them, which will allow the garnishment of wages and bank accounts. Winning the case does not always guarantee to receive funds. Collectors may then try placing levies on bank accounts or motor vehicles and can also place a lien on the property. They can even try forcing the sale of an asset to obtain payment and remit the debt to the creditor.

How Collection Agencies Make Money

If clients stop paying their bills, companies often turn to cozgencies for help. Rather than sending letter after letter and wasting time with phone calls chasing down each client, businesses often choose to hire a collection agency.

Collection agencies are businesses, too, and as such, they are motivated to collect the debt to make a profit. There are two ways that collection agencies can make money.

One: Buying Debt

Some companies earn money by buying the debt from the creditors. They purchase the debt at a low cost, freeing the creditor from the responsibility. Then, when they collect the money from the debtor, they keep it, making a profit.

These agencies buy debts that are large and may even be old. Since they purchase them at incredibly low prices, they can make money if they are able to collect.

Two: Collection Agency Fees

Many collection agencies profit through fees, which they charge clients for their debt collection services. Fees may vary by agency. Some charge a flat fee, others charge a commission, and some collection agency fees come in the form of percentages, which are based on a variety of factors.

Regardless of the method, agencies who charge fees and collect the debt for the creditor can still make a profit.

How are Collection Agency Fees Determined?

Collection agencies base the percentages they charge on a number of factors, including the risk they take in assuming the role of collecting the debt. So, a new debt for a smaller amount of money would have a lower rate than the collection agency fee for an older debt that is for more money.

A standard debt would be considered a new account with reliable contact information that is expected to be relatively easy to resolve. Typical collection agency fees for such accounts range between 20 and 25 percent commission. Accounts that are older and may be more difficult to collect, like those with missing or incorrect debtor information, may cost the creditor double the standard fees. The more difficult it is to collect the debt, the higher the collection agency fees.

Hiring a Collection Agency

Before hiring a collection agency to collect a debt, it’s important to understand the collection agency fees. Not only should a business discuss fees with the agency prior to partnering with them, but they should also research various collection agencies and take time to understand their business framework and fee structure.

While hiring an agency does not guarantee that you’ll receive payment on a debt, it does increase the odds. And even with the collection agency fees, collecting a small amount of the money owed to your business is better than not seeing any of it at all.