A Quick Breakdown of the Collections Process
While extending credit likely plays a key role in your operations, collecting on outstanding accounts receivables can create problems depending on the type of business you are in. The rules and regulations governing debt collection vary depending on whether you are dealing with consumer or business-related debts, but many of the same overall principles apply.
The following provides a simplified overview of debt collections processes:
- Discovery: Accounts receivables show that a payment is not made and lists a past due amount.
- Initial efforts to obtain a commitment from the debtor: A creditor should make a general due diligence effort to collect their accounts receivable before they reach a delinquent stage that requires further actions. Polite phone calls and written demand for remittance on a specific timeline, along with good documentation of the debtor’s reasons for delay or refusal are appropriate tools of curing an account before it reaches delinquency
- Recognition of delinquent account: A creditor should always bear in mind that an account is past due at 31 days and that the statistical collectability drops by 8% per month past due.
- Contracting with a collection agency: Unable to bring the account up to date, the creditor assigns the debt to a third-party debt collection agency. Not surprisingly, passing delinquent accounts onto your trusted specialist promptly will consistently yield the best results.
- Third party collection on the debt: Depending on the type of debt, either consumer-specific or business-specific collection processes are used to recover on on outstanding amounts owed.
In their effort to obtain a commitment from the debtor, the collection agency must remain fully compliant with state and local laws which means that the process and methods used will vary based on the conditions.
The Process of Collecting Consumer Debts
Consumer-specific collections involve collecting unpaid debts from individuals. Collections processes in regards to consumers are highly regulated, and efforts must be taken to ensure they are fully compliant with federal laws, such as the Fair Debt Collection Practices Acts (15 U.S.C. §§ 1692-1692p), as well as with state and local legislation. These laws dictate the actions collection agencies may take, how they communicate with consumers, and more.
For example, collection agencies must do the following regarding consumer collection:
- Identify themselves as a debt collector;
- State who the original creditor is and how the consumer can dispute the debt or get verification of the amount sent to them by the creditor;
- Send a written notice to the consumer within the first five days after their initial contact.
In contacting the consumer, it is vital that the collections agency keep in mind they are acting as a representative of the original creditor. It's also critical that they understand how to remain compliant with the collections practices.
It takes significant investment of time and dedication on behalf of the debt collection agencies and their representatives to understand the mission of their clients and to keep the brand and reputation of the customer in high esteem.
The Process of Collecting Business Debts
In business specific collection, the collections agency takes action to resolve unpaid debts and to bring accounts receivables up to date for various business enterprises or other organizations.
Debt collectors for businesses must also be aware of state-specific regulations to remain compliant. It is our focus as an agency to protect your reputation in the business community and to ensure collection compliance while recovering the outstanding balances on your accounts.
Due to conditional variations in regulation for commercial collection, third-party agencies have greater freedom to create custom solutions to suit their clients’ specific needs. Depending on the situation, there are many ways to obtain a commitment from a debtor. Agencies with a keen sense for creativity and customization, can have unique and flexible pricing structures based on any combination of industry verticals to case specific needs of the client.
In terms of payment, business debt collection agencies tend to charge in one of the following three ways:
- Debt Buying: This is when a debt collection agency buys the debt from the creditor at a reduced cost. Having brought the account up to date with the original creditor, the agency then “owns” the debt and attempts to collect on it. As you can imagine, since the agency has no guarantee of collecting on this debt, the purchase price will tend to be a very low percentage of the principal amount of the debt.
- Flat Fee: Some business collection agencies charge up-front, flat fees. You will be presented with a contract which details the length and terms of the agreement, along with any disclaimers or guarantees regarding the outcome, prior to the commencement of any collections actions. As in the case of debt buying, guarantees will be very low and attainable to prevent the agency from internalizing bad debt.
- Contingency Fee: With this type of fee, the amount you pay is a percentage of the amount of the business debt owed. This provides mutual incentive for recovery of your accounts, as the collection agency receives payment based solely on the amount they collect.
At National Service Bureau, we pride ourselves on customizing our approach to our clients. Our business collection process typically follows the contingency fee model while we maintain the ability to provide certain services on a fixed fee basis, in unique cases where it serves our client best. As such, we invest in maximum recovery for our clients. Our agency utilizes a team of investigators while also accessing credit reports, background checks, and other key pieces of information to determine the ability of the business debtor to satisfy the delinquent account. Identifying liquidity, locating debtors, making calls and sending notices is just the start. If the situation warrants it, our agency will work with attorneys to pursue legal action against the debtor as well as follow up on the action of collecting against successful judgements through wage garnishment and liquidation of debtor assets to satisfy the debt after judgements have been procured.
About the Debt Collection Process
In bringing past-due accounts receivables up to date, there are two primary types of collections processes for resolving consumer and business collections: standardized and flexible collection.
Standardized or Rigid Debt Collections Processes
This process is typically used for smaller claims and often involves larger third-party debt collection agencies. The idea of this strategy is to derive a legally compliant collection process that has a minimum cost to execute for the agency within a client vertical. Then develop a fee structure based on an empirically reproduceable result. Efficiency and scale are the keys of the standardized collection process.
This method can be highly effective, provided the collection agency’s approach is appropriate for the client. Important points to consider about agencies that use standardized debt collection processes are as follows:
- There is no analysis of the debt owed. The collector simply understands that money is owed and attempts to collect the debt while ensuring legal and ethical collection compliance.
- They employ bulk mail campaigns. Because these cases are often less complex and the agency has a firm understanding of the regulatory bodies that govern what they can and cannot do, this process often involves sending out standardized collection letters to debt holders.
- They use standardized scripts. To ensure collection compliance, these agencies often create pre-approved scripts that their collectors read from.
- They employ predefined services. Standardized debt collection agencies typically do not offer much flexibility or personalization in terms of call volume or service.
Flexible or Customizable Debt Collections Processes
This process tends to focus on more substantial claims, larger clients, and maximizing the total amount of the outstanding debt collected. Flexible or customizable debt collections are generally offered by smaller to mid-sized third-party debt collection agencies, who are more experienced and offer a more personalized process to meet the unique needs of their clients.
These agencies often focus on and are better suited for more complicated collection cases, and cases where maximum recovery on each account is of paramount concern. Important points to consider about agencies that use standardized debt collection processes are as follows:
- There is a generous amount of advance preparation and investigation. Collectors that use this approach are more likely to perform a thorough review of the case and the information provided prior to initial contact with the debtor.
- The collector researches and verifies the debt owed. The collection agency first confirms that the debtor missed payments, and then explores why the account has fallen behind. Understanding the circumstances surrounding outstanding obligations often plays a vital role in applying the best strategy for obtaining a commitment from the debtor.
- They create a custom action plan. Based on the information provided and evidence uncovered in the research and investigation process, the collector then creates a viable plan of action to collect on the debt.
- They use a variety of methods to contact the debtor. Collectors take a more customized approach to contact the debtor. This may be initiated via mail or email, subsequent follow up via telephone involving the debtor’s home, work, or cell phone numbers—any method that is legally compliant may be used.
- They communicate with the debtor without a script. Script training on compliance is something that an experienced collector has built into their tool set. Flexible debt collection involves critical thinking, creativity and a conversational fluidity to drill down into the details and negotiate a commitment to resolve the debt.
Let NSB Assist Your Organization in Bringing Delinquent Accounts Up to Date
At National Service Bureau, our team has extensive experience in working with both consumers and businesses, creating custom plans that help our clients rectify delinquent accounts. We take action to bring your accounts receivables up to date while ensuring collection compliance with the FDCPA, HIPAA privacy laws, the Telephone Consumer Protection Act, and other applicable regulations and legislation. For more information on collection compliance, check out our guide to debt collection compliance, and learn about some of the essential regulatory bodies that govern the debt collection industry.
Our collection staff is experienced in many different industries including telecom and utilities, insurance and subrogation, medical, finance, education, property management, and realty in commercial collections. We can work with your clients and customers by offering a multitude of payment options that promote firm commitments and result in recovered funds to rectify past due balances and delinquent accounts while preserving your relationship with the debtor in many cases.
Ready to evaluate your debt collection process? Regardless of your industry, you can count on the expertise of the National Service Bureau to increase your recovery. Reach out and call or contact us online to request a free consultation with one of our collection specialists today!