Giving money to a collection agency can feel like handing your lunch money over to a schoolyard bully. But it’s different when you legitimately owe what the collection agency is asking you to pay. Paying a debt collection is often painful because the product or service associated with the debt has long been consumed. If you’re debating on whether you should pay a collection you owe, here are 5 benefits of getting rid of those collections for good.
1. Stop debt collection calls for good.
As long as you have outstanding debt collections, you’ll probably be getting calls from debt collectors. A cease and desist letter may end calls from one particular debt collector. However, since collection accounts often change hands, you’ll keep being contacted about the debt until it’s taken care of.
2. Get approved for credit cards and loans.
Many banks won’t approve your credit card or loan application as long as you have outstanding collection accounts on your credit report. This means no mortgage, no car loan, and no American Express. Even employers won’t hire you for certain jobs if you have unpaid debts on your credit report. Paying the collection won’t remove it from your credit report, but a $0 balance is far better than one that’s still delinquent.
3. Improve your credit score.
As collections get older, they affect your credit score less. Of course, collection accounts will disappear from your credit report after seven years. As long as the accounts are still within the credit reporting time limit, a paid collection is better for your credit score than an unpaid one.
4. Eliminate the risk of being sued.
People assume that debt collectors won’t waste their time or money suing over a small debt collection. This assumption isn’t always true. As long as you have an outstanding collection that’s still within the statute of limitations, you run the risk of being sued for what you owe. A lawsuit could lead to a court judgment, a public record that will also tarnish your credit report for seven years. And if you still don’t pay up, the collector may get court permission to garnish your wages.
5. You’re closer to being debt-free.
Paying off a debt collection means there’s one less company you owe money to. You may feel like you’ve lost the battle if you pay a debt collection after resisting for months or years. In the long run, paying off a debt collection is better for your credit and your finances. Taking care of debt collections is a good thing, when you can afford to do it.
Debt Collection Agencies Overview: Debt collection agencies are hired by banks and other lending institutions to recoup payments on loans that have gone in arrears. They also are hired by various other providers of expensive goods and services (notably hospitals) to collect on large bills that have gone unpaid.
Debt Collection Careers: The core employees of debt collection agencies are collection agents, usually phone representatives who call debtors with demands for payment. In some cases, these phone representatives may be given limited authority to negotiate terms with debtors. In all cases, the position requires, or can help develop, sales and marketing skills.
Debt collection agencies also employ back office staffs involved in areas such as:
• Relationship management with creditors
• Receiving and tracking payments
• Setting parameters for negotiating with debtors
Billing: Debt collection agencies typically are paid on a commission basis, retaining a portion of the funds that they collect on behalf of the creditor. Individual collection agents themselves may be compensated either on a commission basis, or on a salary plus bonus formula, with the bonus tied to collections.
Debt Collection Agencies Outlook: According to a study by the research firm IbisWorld released in November, 2008, the aggregate revenues of debt collection agencies will be approximately $14.3 billion in 2008, nearly double the 1997 figure and growing to a projected $17.8 billion in 2014.
An improving economy should result in fewer new cases of borrowers falling into arrears on their loans, but opportunities for debt collection agencies may increase, nonetheless, since debts formerly considered uncollectable may then become recoverable, as the borrowers’ financial situations improve.
Every small business runs on cash, and cash only comes in when you collect money that is due you. Set up a debt collection system, with billing, accounts receivable management, and collection practices that include small claims court and which abide by the Fair Debt Collection Practices Act. Start now to get the money your customers owe you.
1. How to Get Paid
Rule #1 in collecting debts: The longer a debt is owed, the less likely you are to collect it. Rule #2 in collecting debts: Some people won’t pay, no matter what. A system for collecting the money your customers owe can help you keep going, with Rule #1 in mind and minimizing the number of people who become Rule #2.
Set up your debt collection system when you first start your business, keep tweaking it to improve your collections, and you will maximize your cash flow from receivables.
2. Set up Your Billing System
Before you start your business, take some time to determine how you will bill customers. Putting together a billing system and plan will help you collect more money faster. How often will you bill? How will you communicate with customers who owe you money? Will you make phone calls? Send letters? Both?
Don’t wait until you have a ton of receivables to collect. Start now to develop that system, always remembering Rule #1.
3. Abide by the Fair Debt Collections Practices Act (FDCPA)
The Fair Debt Collections Practices Act (FDCPA) does not apply to business debtors, but you must abide by it when attempting to collect money from consumers. The Act protects consumers against harassment and privacy violation by creditors and it regulates who you can contact, how often, and how you can represent yourself. Consumers can bring lawsuits against bill collectors, so please read this article before you contact customers about debts owed to your business.
4. Use an Accounts Receivable Aging Report to Monitor Collections
An accounts receivable aging report is an important tool to help you monitor outstanding bills and see what needs to be collected. This report can show you who owes how much and how long it has been unpaid. With this information, you can set your collections strategy for individual customers.
5. Take Your Collections Case to Small Claims Court
Small claims court is a good possibility for collecting money owed you, if the amount owed is small (under the small claims limit for your state) and you don’t expect to do business with this customer again.
6. If Your Debt Collections Efforts Don’t Work
Remember Rule #2 above? Some people just won’t pay, no matter what you do. So, what now? Find out how to write off a bad debt at the end of a year and take a tax deduction for the loss of sales.
7. Sell Your Accounts Receivable
Selling accounts receivable is a common business practice called “factoring.” You can sell your receivables to someone who will pay you for them – at a discounted value, of course. Then the factor collects the money. If you are short of cash, factoring can be a good way to raise some quickly.
Your credit report contains information about your credit accounts, e.g. credit cards, loans, etc. Most, if not all, of your creditors send monthly updates about your payment status to your credit report.
When an account is sent to a collection agency, either the original creditor or the collector updates the account on your credit report with a “collection” status. The creditor doesn’t have to tell you that your account is being sent to collections. However, the debt collector does have to notify you that they are collecting the debt before they can take any action.
What Does It Mean For Your Credit?
A debt collection is one of the worst types of credit report accounts. A collection account shows that you have been seriously delinquent on an account. Your credit score will drop if a collection appears on your report. You may be denied for credit cards and loans in the future, especially if the collection is recent or remains unpaid or both.
Debt collection accounts can stay on your credit report for up to seven years. You can lessen the effects of a collection on your credit score by paying it off. As time passes, the collection account will have a less significant impact on your credit. Continuing to pay all your other bills on time will also help your credit score recuperate from a debt collection.
According to the Federal Trade Commission, debt collectors are one of the most complained about businesses and with good reason. Few people have positive experiences dealing with debt collectors. Even the rare nice ones can be a nuisance. But it’s typically cheaper for businesses to use collectors, so it’s not likely that these types of accounts are going anywhere soon.
What is a Debt Collection?
A debt collection is a type of account that’s been sent to a third-party debt collector. Debt collectors are people who make a living collecting unpaid debts for others. The original company with which you created the debt most likely sent the account to the collection agency after you missed several payments. From a business perspective, it’s often cheaper for companies to hire debt collectors than to spend their own resources pursuing payment on a such a delinquent account.
Different creditors and lenders have different policies for sending accounts to collections. Reviewing your credit card or loan agreement will give you some information about your creditor’s timeline. Many credit card accounts are sent to a collection agency after 180 days of non-payment.
What to Expect When You Have a Debt Collection Account
In their attempt to collect from you, debt collectors will call you, send you letters, and place the collection on your credit report. If they have your work phone number, they’ll even call you at your place of employment unless you let them know your employer doesn’t approve of those calls. Some collectors have been known to show up at a person’s home in their attempt to collect a debt. Surprisingly, that’s legal.
Debt collectors may call you several times a day, especially if you don’t answer their phone calls. However, collectors are forbidden from calling you back-to-back in an attempt to annoy you. Debt collectors can only call you between the hours of 8 a.m. and 9 p.m. your local time.
When a debt collector has a hard time reaching you, they may call your friends or neighbors to make sure they have the correct contact information for you. They’re not allowed to reveal that they’re collecting a debt and they can’t contact the same person more than once.
Debt collectors will also send bills to the address they have on file for you. In their first bill to you, they have to notify you that you have 30 days to request validation for the debt. That notice may also be given to you over the phone if a phone call is the first contact the collector has for you. If they don’t have the correct address, you may never receive a notice of the debt. And if the collector doesn’t have your correct phone number or address, you may not find out about the account until you see it listed on your credit report.
Debt collectors are required to abide by the Fair Debt Collection Practices Act, or FDCPA, when they’re collecting a debt from you. However, collectors are well-known for violating this law.
According to federal law a debt collector has certain rights to pursue repayment from you. However, even if you owe money, you too, have legal rights about how you are contacted and pursued. The Fair Debt Collection Practices Act (FDCPA) applies to debt collectors, lawyers who regularly collect debts, and collection agencies. It may not apply to a collector who is a direct employee of an actual creditor that you owe money to. But most unpaid debts do end up in collections with outside collectors.
Does the FDCPA Protect Sole Proprietorships?
Yes! The same rights afforded to individuals under the FDCPA also protect sole proprietors. The FDCPA does not release you from your debt obligations, but it does control how debt collectors can pursue women business owners for their business’ debt.
Most women small business owners today own sole proprietorships. If you are a woman sole proprietor, or in many cases, involved in a partnership, you may be personally responsible for any debts that your business has incurred.
Laws that apply to debt collection from individuals also apply to collection procedures from business owners when the business’ debt is their own personal responsibility.
Debt collectors can be difficult to deal with, and in some cases, even seem cold-hearted. But, as with any other business transaction, it is important to keep things in perspective. Debt collectors are simply doing their own job, which is, to collect money that you owe.
Debt Collection Agencies Overview: Debt collection agencies are hired by banks and other lending institutions to recoup payments on loans that have gone in arrears. They also are hired by various other providers of expensive goods and services (notably hospitals) to collect on large bills that have gone unpaid.
Debt Collection Careers: The core employees of debt collection agencies are collection agents, usually phone representatives who call debtors with demands for payment. In some cases, these phone representatives may be given limited authority to negotiate terms with debtors. In all cases, the position requires, or can help develop, sales and marketing skills.
Debt collection agencies also employ back office staffs involved in areas such as:
• Relationship management with creditors
• Receiving and tracking payments
• Setting parameters for negotiating with debtors
Billing: Debt collection agencies typically are paid on a commission basis, retaining a portion of the funds that they collect on behalf of the creditor. Individual collection agents themselves may be compensated either on a commission basis, or on a salary plus bonus formula, with the bonus tied to collections.
Debt Collection Agencies Outlook: According to a study by the research firm IbisWorld released in November, 2008, the aggregate revenues of debt collection agencies will be approximately $14.3 billion in 2008, nearly double the 1997 figure and growing to a projected $17.8 billion in 2014.
An improving economy should result in fewer new cases of borrowers falling into arrears on their loans, but opportunities for debt collection agencies may increase, nonetheless, since debts formerly considered uncollectable may then become recoverable, as the borrowers’ financial situations improve.
Hate collecting your money? Join the crowd. Recent OPEN Small Business Network Polls from American Express shows accounts receivables is the top cash flow concern of small business owners. Learn the secrets of collection letters and other mastery tips to ensure your customers pay.
You started your business to make a difference, to delight a customer, to express your vision, not to become the bank of choice for your customers. Use the following collection letter and debt collection mastery tips:
Take a Positive Stance: Don’t take it personal if your customers aren’t paying the bills. Explore why the bill is late. It could be your client simply forgot. Provide a gentle reminder immediately following the due date.
Increase Directness Gradually: One of the secrets of collection letter mastery is to gradually increase the assertiveness of the letter over time. Your first letter is positive and helpful, the third collection letter may show concern for their situation, and so it builds.
Use Multiple Channels: In today’s electronic age, handling your entire invoicing and collection letter sending by email is simple and quick. It also can ensure your correspondence is buried in an overstuff inbox and low priority. Use additional means of sending out your collection letter correspondence including faxes, phone calls, regular mail, courier, and telegrams.
Empower the Right People: As a small business owner the temptation is great to have the sales people handle accounts receivables. It’s better to assign one person to the task and provide proper support, training, and incentive.
Call the Heavy Hitters: After numerous calls and collection letter correspondence you’ll reach a point where the account is long overdue. Bring in a collection agency to handle these delinquent clients. Spending too much time and resources can be draining on your operations.
Don’t Ignore FDCPA: There are laws and regulations as to how collection agencies can go about collecting debt. Debt collectors cannot lie to, mislead, or harass your customers. Make sure the collection agency you select abides by the Fair Debt Collections & Practices Act (FDCPA).
Run a Credit Report: Reduce your overdue accounts by running a credit check on your potential business client before the deal is done. Expect to spend at least $30 on a Dun & Bradstreet report. D & B uses self reported data but adds credibility by including: banking data from company suppliers, bankruptcy filings, media sources, suits, liens, and judgments.
Always Check References: Any small business planning to sign a “big deal” would be advised to run trade and bank reference checks. Simply inquiring with your potential client’s or partner’s bank can reveal important banking relationship information and how they have maintained their accounts.
Change Industries: To improve your collection abilities, diversify your business into industries that have a tendency to pay bills on time and who have lower failure rates.
Handling the debt collection process is a responsibility of successful business ownership. Too many small businesses place aging receivables and collections as a low priority. It’s important to monitor your cash flow and aging receivables on a monthly basis or more. It’s ok to write off bad debt, but in the end, it’s your business savvy to handle the matter that will impact your growth.
A Debt Collection Agency is a business that collects debts for a fee or percentage of the total amount owed on behalf of the original creditor.
While some debt collection agencies offer flat fee services, most operate on a contingency fee basis. The fee the debt collection agency charges is based on how old the debts are and how much business a creditor has to offer. The less amount of time the debt has been outstanding and the more outstanding accounts receivable a business has, the lower the percentage the debt collection agency will charge for collections.
The standard rate in the collections industry for business-to-business accounts is 30 percent. The rate for collecting consumer accounts is higher. The typical collection agency fee is in the 20 to 40% range.
This may seem like a lot, but debt collection agencies have experience with and knowledge about debt collection that individual business owners don’t have and hiring one can be well worth it if the amount of outstanding accounts receivable warrants it.
If you do hire a debt collection agency to collect your business’s debts, note that in Canada debt collection agencies are regulated by the province in which they operate. That doesn’t mean that you have to hire a local collections agency; just that you need to be sure that the collections agency you hire is fully licensed and bonded in your province.
From a consumer’s point of view, the fact that collection agencies are provincially regulated means that what a debt collection agency is allowed to do when pursuing collections also varies from province to province, although there are commonalities.
The Federal Trade Commission is the primary federal regulator of collection agencies, although the Bureau of Consumer Financial Protection—created in 2010 and housed within the Federal Reserve—will also have regulatory power over collection agencies. Many States and a few cities require debt collection agencies be licensed and/or bonded. In addition, many States have laws regulating debt collection, to which debt collection agencies must adhere (see Fair debt collection).
The Fair Debt Collection Practices Act is the primary federal law governing debt collection practices. The FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that violates the Act. Alternatively, the Federal Trade Commission or the state attorney general may take action against a noncompliant debt collection agency, including issuing fines, ordering damages, restricting its operations or even closing it down (see, e.g. CAMCO).
The FDCPA specifies that if a state law is more restrictive than the federal law, the state law will supersede the federal portion of the act. Thus, the more restrictive state laws will apply to any agency that is located in that state or makes calls to debtors inside such a state.
In addition to state and federal laws, a majority of U.S. debt collection agencies belong to trade group ACA International and agree to abide by the association’s code of ethics as a condition of membership. ACA’s standards of conduct require its members to treat consumers with dignity and respect, and to appoint an officer with sufficient authority to handle consumer complaints. Consumers may also resolve disputes brought against a debt collection agency who is a member of ACA through ACA’s consumer complaint resolution program.
