Debt collectors sometimes have a bad rap, but the truth is that they provide an important service to society so long as their practices are ethical in nature (i.e. they’re not threatening to break your kneecaps if you don’t pay). Although such horror stories have occurred in the past, the truth is that they are extremely rare, and of course, they’re illegal. In reality, debt collection agencies are the most useful means to get someone who has a legitimate contractual obligation to make good on their promise so that the honest businessman (perhaps yourself or your company) on the other side of the trade doesn’t get left holding the bag.
Choosing the right debt collection agency is an important decision that can have both positive and negative repercussions for your business. With that in mind, here are three tips to choose the right collections company to manage your accounts receivable.
1. Research the Company
Are they licensed and do they need to be? 34 out of 50 states require collection agencies to be licensed in order to conduct business.
Licensing requirements, bonding requirements, and the associated fees vary by state which makes for a complicated landscape if you’re a collection agency trying to started. Companies must comply with the requirements for the state(s) in which they practice. A list of the requirements by state can be found on the InsideARM website.
Are they bonded and do they need to be? 29 out of 50 states require collection agencies to be bonded in order to conduct business.
A “bonded” collection agency is one that has taken out a surety bond with an insurance company that provides them. Surety bonds are legally enforceable contracts between three parties: typically the principal (the collection agency), the obligee (the state government), and the surety (the insurance company that issues the bond). If the collection agency violates the terms of their bond (e.g. breaks a regulation or inappropriately handles payments), the state government can make a claim with the insurance company against the bond. The insurance company will evaluate the claim, pay it if it is determined to be valid, and then subsequently seek reimbursement from the collection agency.
Do they have insurance?
Debt collection companies may have Errors and Omissions (E&O) Insurance in addition to the surety bond they are required to maintain with the state. E&O Insurance protects an agency against suit in the event that a debtor believes they used aggressive tactics or acted in bad faith. Such insurance is not required, however, it is a prudent business decision for the agency and its clients given the nature of debt collection. To find out whether or not your collection agency is covered, ask them for proof of insurance.
Are they a member of ACA International?
The Association of Credit and Collection Professionals (ACA International) is a trade group that specializes in debt and the collections industry. Membership in ACA International is voluntary and subject to internal review by the ACA Ethics Committee. Members must comply with the organization’s strict Code of Ethics. A company can have their ACA membership revoked if they do not uphold ACA International’s ethical standards for debt collection. You can search the ACA International member directory here.
2. Compare Costs
Most debt collection companies charge either as a percentage of the amount successfully collected, or via a flat-fee. You may or may not have the option to choose the payment structure depending on the company. Here are some positives and negatives of each type.
Payment as a % of Collections: This is a common arrangement between a collection agency and a creditor that is likely to involve a signed contract. Fee percentages generally fall between 25 and 40%. The upside is that you pay nothing if the collection agency is unsuccessful in their collection efforts (risk-free). The downside is that payment is typically much higher than a flat-fee when/if the collection efforts are successful. You are essentially paying for the collection company to assume the risk of doing work for nothing in exchange for a larger chunk of the debtor’s obligation. Collection agencies that believe in their ability to collect and creditors that don’t want to risk losing even more money generally find this type of “contingency payment” to be mutually beneficial.
Flat Fee: This is typically a small amount often associated with pre-collection services (collection efforts that happen very early in the process). Flat-fee payment structures may transition to contingency payments if/when the account is placed in full collections.
Whether hiring a collection company for pre-collection services, or moving into full collections, it is important to note that if at all possible, it is most advantageous to resolve the issue yourself. Start by sending a written demand for payment to the debtor with a post-office return/receipt verification to legally verify the notice was received. State the facts of the case regarding the debtor’s payment obligations and offer to work with them on new payment terms if you are both willing and able.
3. Find Out Their Process
Do they specialize in a particular type of debt collection?
Some collection agencies specialize in handling accounts receivable for enterprise size firms, while others focus on small-to-medium sized businesses. Find out the type of clients most typically served and evaluate whether or not you fall into that category.
Debt collection can be further broken down by industry as well as by type of collection service. Industries include commercial collections (e.g. default on a business contract), education collections (student debt), finance (e.g. credit card, auto loan, or mortgage debt), medical collections (hospital bills), insurance collections, government collections or telecom and utilities collections (e.g. the monthly phone and energy bills).
Note: most collection companies will start their collection efforts small and expand them based on the success they have negotiating payment with the debtor. Typically, collection work starts small with things like letter services and pre-collection phone calls before escalating into legal suits as earlier efforts prove unsuccessful.
Do they use skip tracing?
Skip tracing is a way of “tracing” (finding) a debtor who has “skipped” town in an effort to get out of a debt that is owed. A good collections agency has access to database information that allows them to locate debtors that have relocated without furnishing a forwarding address. Skip tracing is highly relevant if you’ve been attempting to contact the debtor and have been routinely ignored.
Do they comply with the applicable regulations? FDCPA, TCPA, and HIPAA?
All debt collection work falls under the Fair Debt Collection Practices Act (FDCPA). The use of telecommunication equipment while conducting debt collection efforts falls under the Telephone Consumer Protection Act (TCPA). Medical collections are affected by the Health Insurance Portability and Accountability Act’s (HIPAA’s) Privacy Rule in that collection companies must safeguard PHI (Protected Health Information) while conducting their business.
Finding the right debt collection company depends on the needs of your business, your geographic location (state), and the particulars of your situation. For more debt collection tips and industry information, subscribe to the National Service Bureau blog.