Debt collection
Debt collection or cash collection is the process of pursuing payments of money or other agreed-upon value owed to a creditor. The debtors may be individuals or businesses. An organization that specializes in debt collection is known as a collection agency or debt collector. Most collection agencies operate as agents of creditors. They collect debts for a fee or percentage of the total amount owed. Historically, debtors could face debt slavery, debtor's prison, or coercive collection methods. In the 21st century in many countries, legislation regulates debt collectors, and limits harassment and practices deemed unfair.
Background
s are issued with terms of payment. These terms vary widely from 'cash terms', meaning that the invoice is due immediately, to many forms of 'credit terms'. Unpaid invoices are considered outstanding, and those which remain unpaid for periods longer than their 'terms' indicate are considered overdue. It is the aim of the cash collection function of a business to collect monies for all outstanding invoices before they become overdue and to mediate payment arrangements to ensure that invoiced debts do not become doubtful or bad.History
Debt collection has existed as long as there has been debt and is older than money itself, as it existed in earlier barter systems. Debt collection goes back to the ancient civilizations, starting in Sumer in 3000 BC. In these civilizations, if a debt could not be paid back, the debtor and the debtor's spouse, children, or servants were forced into debt slavery until the creditor recouped their losses through the physical labor of the enslaved. Under Babylonian Law, strict guidelines governed the repayment of debts, including several basic debtor protections.In some societies debts would be carried over into subsequent generations and debt slavery would continue, but other early societies provided for periodic debt forgiveness such as jubilees, or would set a time limit on a debt.
The Bible issues stern restrictions regarding how much interest to charge on a loan. The Quran prohibits any amount of interest on loans given and encourages direct transactions. The Abrahamic religions discouraged lending and prohibited creditors from collecting interest on debts owed. By the Middle Ages, laws came into being to deal specifically with debtors. If creditors were unable to collect a debt they could take the debtor to court and obtain a judgment against the debtor. This resulted in either the bailiff of the court going to the house of debtor and collecting goods in lieu of the debt, or the debtor being remitted to debtor’s prison until the debtor's family could pay off the debt or until the creditor forgave it.
In occupied territories of the Roman Empire, tax collectors were frequently associated with extortion, greed, and abuse of power.
In medieval England, a catchpole, formerly a freelance tax collector, was a legal official, working for the bailiff, responsible for collecting debts, using often coercive methods.
Once debtors prisons were abolished during the early 1800s, creditors had no solid recourse against delinquent debtors. If collateral was involved in the debt, such as with a mortgage, the creditor could take the property in order to indemnify themselves. However, for unsecured debt, creditors could not collect on their investments if the debtors had no money. Even if a creditor obtains a judgment against the debtor in court, collection remains dependent on the debtor's being able to repay the judgment. In a transaction involving the sale of goods, a court could potentially order the goods to be seized and returned to the seller, but many lenders and creditors had limited recourse beyond trying to verify a borrower or customer's creditworthiness before entering into a loan or transaction.
During the Great Depression of the 1930s in the United States, large financial institutions relied heavily upon foreclosure to collect outstanding mortgage debts, which gained an overwhelmingly negative public perception.
Definitions
Collection account
A collection account is a person's loan or debt that has been submitted to a collection agency through a creditor.Credit record
A credit record is a record of the credit history of a person or business entity, potentially including payment history, default and bankruptcy. Information about debts, late payments and default may be placed by a borrower's credit record, and usually remain for several years. Reports to credit reporting agencies may not necessarily be properly authenticated or checked for accuracy.Debtor
The person who owes the bill or debt is the debtor. Debtors may fail to pay for various reasons: because of a lack of financial planning or overcommitment on their part; due to an unforeseen eventuality such as the loss of a job or health problems; dispute or disagreement over the debt or what is being billed for; or dishonesty on the part of either the creditor or the debtor. The debtor may be either a person or an entity, such as a company. Collection of consumer debt is subject to greater regulation than the collection of business debt.Collection agencies
There are two principal types of collection agencies. First-party agencies are often subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. Debt buyers purchase the debt at a percentage of its value, then attempt to collect it. Each country has its own rules and regulations regarding them.First-party agencies
Some collection agencies are departments or subsidiaries of the company that owns the original debt. First-party agencies typically get involved earlier in the debt collection process and have a greater incentive to try to maintain a constructive customer relationship. Because they are a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies.These agencies are called "first-party" because they are part of the first party to the contract. The second party is the consumer. Typically, first-party agencies try to collect debts for several months before passing it to a third-party agency or selling the debt and writing off most of its value.
Third-party agencies
A collection agency is a third-party agency, called such because such agencies were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications. This however is dependent on the individual service level agreement that exists between the creditor and the collection agency. The agency takes a percentage of debts successfully collected; sometimes known in the industry as the "Pot Fee" or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance; very often this fee must be paid by the creditor if they cancel collection efforts before the debt is collected. The collection agency makes money only if money is collected from the debtor. Depending on the type of debt, the age of the account and how many attempts have already been made to collect on it, the fee could range from 10% to 50%.Some debt purchasers who purchase sizable portfolios use a Master Servicer to assist in managing their portfolios across multiple collection agencies. Given the time-sensitive nature of these assets, an advantage of this technique is that it gives the debt purchaser more control and flexibility to maximize collections. Master Servicing fees may range from 4% to 6% of gross collections in addition to collection agency fees.
Some agencies offer a flat fee "pre-collection" or "soft collection" service. The service sends a series of increasingly urgent letters, usually ten days apart, instructing debtors to pay the amount owed directly to the creditor or risk a collection action and subsequent negative credit report. Depending on the terms of the SLA, these accounts may revert to "hard collection" status at the agency's regular rates if the debtor does not respond.
In many countries there is legislation to limit harassment and practices deemed unfair, for example limiting the hours during which the agency may telephone the debtor, prohibiting communication of the debt to a third party, prohibiting false, deceptive or misleading representations, and prohibiting threats, as distinct from notice of planned and not illegal steps.
In the United States, consumer third-party agencies are subject to the federal Fair Debt Collection Practices Act of 1977, which is administered by the Federal Trade Commission.
In the United Kingdom third-party collection agencies that pursue debts regulated by the Consumer Credit Act must be approved and regulated by the Financial Conduct Authority.
Purchasers of debts
Debt collection may involve the sale of a debt to a third party company, sometimes referred to as a "factor" or "debt buyer". The debt buyer purchases accounts and debts from creditors for a percentage of the value of the debt and may subsequently pursue the debtor for the full balance due, including any interest that accrues under the terms of the original loan or credit agreement. The sale of debts and accounts provides a creditor with immediate revenue, albeit reduced from the face value of the debt, while shifting the work and risk of debt collection to the debt buyer.In the United States during the savings and loan crisis of the 1980s, there was a huge resurgence of foreclosures and written-off accounts, similar, although on a much smaller scale, to that of the Great Depression. Some financial innovators decided that there may be some profit in buying up delinquent accounts and attempting to collect a small portion of the amount due. They purchased these accounts from the original lenders at pennies on the dollar, and turned profit by collecting a fraction of what was owed by the debtor.
Some states have specific laws regarding debt buying. Massachusetts requires companies that buy debt to be licensed while California does not.