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  1. Home
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  4. How Do Collection Agencies Work?

How Do Collection Agencies Work?

By: Jack S. Waverly
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Collection agencies can be found in two different forms: in-house collection and third-party collection. The in-house collection agencies are most often the billing department for a credit agent or large firm which offered time payments. These are used to collect money while keeping the collection costs low and within the company. Most often this will be the first collection attempt you will come across.

How They Get Your Account

Third-party, or outside, agencies are those which are hired by a firm to collect a past due amount. These are the most common types of collection agents people come into contact with. These companies either work on percentage or purchase charged-off debt from the original creditor.

How Collection Agencies Make Money

Many collection agencies and their agents work off a percentage of what debts or payments they can collect. Others purchase your debt for pennies on the dollar and then attempt to collect the full amount. Usually if a debtor pays off what they owe, the collection agency makes money from either the payments or from the difference between the costs of buying the debt and the amount collected. In most cases, the collection agency makes from one-quarter to one-half of the full amount as profit. If the collection agency cannot collect the debt, they will often sell the debt to another agency to break even and look for more successful accounts; this usually creates the involvement of three or more agencies with one account while the original creditor has written off the account as a loss.

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How Collection Agencies Collect Debts

Collection agencies have four methods to collect a debt: letters, direct contact, reporting the debt to credit reporting bureaus and suing for the debt. Suing for the debt is the least used method because of cost and time consumed. Letters and direct contact are the most often used and can be the most successful methods. If a constant stream of letters or phone calls does not yield results, often the threat of bad credit will bring results. Most collection efforts will be made with form letters and pre-recorded call messages to save on costs and the need for employees. This allows a collection agency to manage its efforts to collecting money from a greater number of accounts.

Collection agencies often use flexible payment options to work out an agreement. Some agencies use a discount option where the debtor can pay half of the debt owed to settle the account. This is usually the case when the debt is very old or very large and is used to cover costs and clear dated accounts.



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