Collection agency
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A collection agency is a business that pursues payments on debts owed by individuals or businesses. Some collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Others work on their own accounts, purchasing debts from creditors for less than the dollar amount of the debt and aggressively persuading the debtor to make their payments. Such agencies are sometimes known as "debt buyers". A creditor may send debts to a collection agency in order to remove them from their accounts receivable records; the account is then written off as a loss.
Debt collection agencies have a reputation for engaging in threatening behavior, harassment or coercion. However, collection agencies are governed by laws to which the majority of agencies adhere. Failure to adhere to such laws may result in lawsuits that often result in not only full waiver of the debt, but also in large fines that must be paid to the offended party. [Federal Trade Commission 28th annual report], viewed April 23, 2006.
Collection Agencies in the United States
The following information applies primarily to collection agencies in the United States of America, which make up the majority of all collection agencies worldwide. However, much of this information is relevant outside the United States as well.First Party Agencies
Some "agencies" are departments or subsidiaries of the company who owns the original debt. These are usually the least likely to settle for less than the total balance. Because they are a part of the original creditor they are not subject to many of the laws which govern collection agencies. These agencies are called "First party" because they are part of the first party of the contract, the merchant. The second party is the consumer, also called the debtor in collections terminology.Third Party Agencies
The term collection agency is usually applied to these agencies. They are called "third party agencies" because they were not a party to the original contract. In the United States, consumer third party agencies are subject to a federal law called the Fair Debt Collection Practices Act or FDCPA. This federal law (passed in 1977) is administered by the Federal Trade Commission or FTC. The FDCPA also specifies that if a state law is more restrictive than the federal law, the state law will supersede the federal portion of the act. The more restrictive state laws apply to any agency that is located in that state or makes calls to debtors inside that state.Assignment of Debts
Owed bills or debts are referred to as accounts by bill collectors. Today, more and more accounts are being purchased by debt buyers than in the past. Traditionally, it has been common business practice to assign accounts directly to an agency, which costs nothing for the merchant or the collection agency, excluding the cost of communications by mail and telephone. In this way, the collection agency is acting as a legal agent for the merchant. The collection agency only makes money if money is collected from the debtor. The agency will then take a percentage of the amount owed (usually 15% to 50%, depends on the type of debt) and the remainder is turned over to the client (the original merchant).Bill Collectors
The modern business model is the primary reason for the many complaints brought against collection agencies. Knowing they will make no money if they don't bring in money, bill collectors are highly motivated to convince debtors to pay the debt, often to the point that they sound threatening to the debtors. Most consumers are accustomed to being treated with a certain amount of "customer service" and often complain that they do not receive that treatment from bill collectors. In many cases, firm treatment is necessary to convince debtors to pay their debt. Many people find this uncompromising stance "threatening", even though it is not considered as such by bill collectors or by law [15 USC 1692d], viewed May 9, 2006., and it is often necessary to effectively motivate a debtor to pay a bill.Many bill collectors find their jobs to be stressful. Their base salary is often low, requiring them to bring in enough money to earn commission. [Salary.com], viewed March 15, 2006. They often spend the majority of their day arguing with debtors, and sometimes being sweared at, insulted, and threatened by the people they talk to. Bill collectors also spend time calling debtors who do not answer their phones, often leaving messages stating only that the call "must" be returned. With the advent of Caller ID, debtors are often able to avoid answering their phones to bill collectors.
Debtors
The person who owes the bill or debt is called the debtor. Some people become debtors because of a lack of financial planning on their part. They become overwhelmed with all of their bills, such as utilities, cell phones, credit cards, and others, until they finally "give up." Often, the only way for a bill collector to motivate this kind of debtor to pay is to explain the actions the collection agency will take if they do not pay their debt.Other people become debtors because of an unforeseen and uncontrollable event that disrupted their life. Examples include the loss of a good paying job, an accident at work or while driving that leaves them unable to work, or a sudden and serious illness. Usually, the only way to motivate this kind of debtor to pay is to work with them by taking small payments until they can overcome the problem and pay off the remainder of the debt.
Legal Remedies
Some debtors simply refuse to pay the bill. In this case, the collection agency will often sue the debtor in the hope that either the debtor will be scared into paying upon service with legal papers, or that the court system will help the collection agency to force the debtor to pay.Most collection agencies in the United States hire outside collection lawyers. These collection attorneys frequently have considerable experience in debt collection lawsuits.
First, the lawsuit is filed with the court. Then, the debtor must be notified of the lawsuit by having the court documents delivered to them, usually in person. This is known as "Legal Service". The person presenting the documents to the debtor is either a "Process Server", and usually works for a separate process service company, to avoid allegations that service was not done correctly. Depending on local laws process may also be served by a local Sheriff’s Deputy.
Once the debtor is served, he or she must take some action to respond to the lawsuit, though the specific type of response depends on individual state law. If there is no response, the collection attorney will usually request that the court grant a default. A default judgment basically declares the collection attorney as "the winner" because the other side (the debtor) did not respond to the legal notice. Default judgment is almost always granted if the debtor does not respond to the lawsuit.
Once the collection agency's attorney has obtained judgment, they are empowered to take action to obtain the money from the debtor. A number of options are open, depending on the state the debtor is in, and the status of the debtor's employment and assets.
Typically, the most effective method to collect on a legal judgment is often to garnish a debtor's wages. The court will send or serve an order of garnishment to the employer. This requires the employer to deduct a certain percentage of the debtors paycheck and forward it to the court, which in turn forwards the money to the collection attorney. However, depending on the state the debtor resides, those who are generally earning less than $20,000.00 per year cannot be garnished by third party collectors. Also, debtors who are already being garnished, especially in cases of child support, cannot have additional wages garnished.
A collection agency or collection attorney may also seize some or all of a debtor's assets, such as automobiles, bank accounts, and real estate. They may also place liens on certain bonds the debtor may have with the government such as the bond that contractors are required to have when operating a construction company.
Specific laws and procedures can vary considerably from state to state. Most states have Statute of Limitations laws which limit the length of time from the commencement of delinquency in which a collection agency can file suit.
The Fair Debt Collection Practices Act
The FDCPA sets guidelines that collection agencies must follow. If a violation is brought to the attention of the Federal Trade Commission or the state Attorney General, the collection agency may be sued or even closed by the government. [Selected Commission FCRA Actions], viewed May 9, 2006. For this reason, collection agencies are often very strict in requiring their employees follow not only every provision of the FDCPA, but also any possible precedent set by legal proceedings against collection agencies.In general, the FDCPA requires that collection agencies do the following:
- Send an initial letter notifying the consumer of the existence of the debt, and that a collection agency is now involved.
- Send verification that the person owes the debt, but only if the debtor requests this in writing. Most agencies will send proof upon oral request, but they are not required to do so.
- Only call between 8AM and 9PM, by the debtor's local time, unless the debtor has given permission to call outside these times.
- Make no more than one contact (actually speaking to the debtor) to the debtor per day, unless the debtor specifically requests more calls. (Multiple calls can be placed, but unless the debtor is spoken with, additional calls can commence within the same day.)
- Cease calling the debtor's place of employment if the debtor requests them to do so.
- Cease calling the debtor at home if they receive a letter from the debtor in writing instructing them to do so. At that point, they are allowed to contact the debtor a final time to inform the debtor that they will no longer be calling, the amount owed on the debt, and what action they intend to take (such as a lawsuit).
- Only communicate information about the debt to the debtor or his/her spouse. However, if asked, a bill collector is required to identify themselves and the company they work for to anyone they are talking to.
- Debt collectors may not swear, insult the debtor, or threaten the debtor. Note that threat is defined by the FDCPA as a statement that the bill collector will initiate physical violence or a claim they will take an action that they do not intend to take. To claim that they will initiate a lawsuit to enforce collection of the debt does not constitute a threat unless they have no intention to actually do so.
- Cease communication with the debtor when notified the debtor has filed for Bankruptcy.
Disclaimer
Please note that this is general information and should not be taken as legal advice. The laws may be different in your country, state, county or city. If in doubt you should consult a lawyer.References
External links
- [Fair Debt Collection Practices Act] - Federal Trade Commission.
- [Bill and Account Collectors] - U.S. Department of Labor, Bureau of Labor Statistics.
- [Debt Collection Agencies] - yourDictionary.com.
- [Private Collection Agencies] - Financial Management Service, a Bureau of the United States Department of the Treasury.
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