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Collection Agency Definition

Collection Agency Definition

A collection agency is in the business of recovering money owed on delinquent accounts. Collection agencies or debt collectors are hired by various types of organizations: (1) medical facilities such as hospitals, group medical practices, clinics, surgery centers, to name a few, (2) commercial businesses with business to business debt, (3) retail establishments which deal with credit cards and other types of electronic payments, (4) financial institutions with outstanding loans, bad checks, and service charges, and (5) all other types of organizations which have debt. To a debt collector, debt is debt.

Some collection agencies incorporate debt buying into their business model. Debt buyers purchase debt from companies at a fraction of its face value and attempt to collect the entire debt.

Debtors are individuals, sole proprietors, and corporations that owe money to individuals or businesses. These debtors have agreed to pay for the product or service they received, however over the course of time have failed to meet their obligation regarding payment. In the case of individuals who are delinquent on their debt obligation, a collection agency will report the debt to multiple credit bureaus. This information is recorded on the debtor's credit report and in many cases will affect the debtor's credit score. A low credit score could affect the debtor's chances of obtaining a loan in the long term, especially since an account under debt collection can remain on a credit report for seven years.

Collection agencies or debt collectors perform a service to their clients based on a contingency fee. The fee is normally subtracted from the collected amount with the remainder going to the client. For example: the agency collects $1,000 for their client and the contingency fee is 30% ($300). The agency would send their client a check for $700 with a detailed statement.

Companies find it more effective to hire a collection agency to recover unpaid debts than employing internal staff members to attempt the collection of the debt. Collection agencies use various methods to collect debts for clients, such as letters, telephone calls, and the use of automated dialers. Agencies have a number of electronic tools and resources available to track down debtors. Many times debtors move to avoid paying the debt so the agency through the use of 3rd party software can track down the debtor to their new address. This is called "skip tracing".

The Federal Trade Commission (FTC) enforces the Fair Debt Collection Practices Act (FDCPA). All collection agencies are monitored by the FTC and must follow the guidelines established by the FDCPA. These guidelines prohibit debt collectors from using abusive, unfair or deceptive practices during the debt collection process.

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