What Do Collection Agencies Do?

Collection agencies are businesses that collect past-due bills and accounts receivable for other persons or businesses in exchange for a fee. Collection agencies charge for their services one of three ways:

1. A flat fee
2. A percentage of what is collected
3. Through a direct sale of the delinquent accounts

If you are trying to collect a small debt, paying a collection agency a flat fee is probably your best option — collection agencies that charge a flat fee work as hard to collect a small debt as they do to collect a large debt. If you have just a few large unpaid receivables, work with a collection agency that charges a percent of the total debt collected (usually 25 to 50 percent). The third option, selling your uncollected receivables at a discount to a collection agency, is advisable only if you have a very large amount of debt — $1 million or more. The selling price is typically a minuscule 2 to 8 cents on the dollar.

Most collection agencies use one of four tactics to collect debt:

1. Letters
2. Direct contact via the telephone
3. Notification to credit reporting bureaus such as Equifax, Experian or TransUnion
4. Litigation

Typically, collection agencies begin the collection process by sending a series of three notification letters, often called demand letters. The final notification letter generally warns the debt dodger that if the past-due account is not paid by a certain date, his or her name or company will be reported to one or all of the big three credit-report bureaus — Equifax, Experian or TransUnion. This warning often prompts action, since unpaid debts stay on a credit report for seven years once reported. Too many reports of unpaid bills on a credit report can lead to denial of future credit.

Many collection agencies also pay their staff to telephone or visit the debtor directly. This direct contact is most useful if your goal is to maintain a good relationship with the debtor. Often, with the help of a collection agency, a flexible payment plan can be worked out and a business relationship can continue.

Litigation — in small claims court or a full-scale courtroom — is a final option.

Besides sending out letters and making phone calls, some collection agencies also specialize in locating debtors who can no longer be reached at the address or phone number listed on their accounts. To determine whether your collection agency offers this service, ask them about their "skip tracing" abilities.