How a collection agency gets started in the recovery of a bad debt

Factual Questions
1

How does a collection agency know when to start collecting bad debts?
I imagine it works something like this:

Company X has sent me a bill and I forgot to pay it. After several reminders, Company X gives up on me and ask the collection agency to collect the money.
[ol]
[li]How does the collection agency know that the bill is legitimate, and I haven’t already paid Company X?[/li][li]Suppose that after the collection agency starts calling me I then contact Company X directly and pay them the money, who is in charge of stopping the collection agency from harassing me? Company X or me?[/li][li]Does the collection agency get the money and turn it over to Company X (keeping a fee for their services), or do they buy outright the debt from Company X (for less than the amount of the debt, of course) and keep all the money they collect?[/li][li]Suppose I think I can prove to the collection agency that I don’t owe any money, but the collection agency says my proof is invalid for some reason, what recourse do I have?[/li][/ol]
Note: this is purely hypothetical, I’m not being dunned by anyone. But this collection agency business seems like a goldmine. I call them and tell them that Bill Gates owes me one million dollars. They start calling Bill Gates every night at dinnertime, Bill (for whom this amount is chump change) bargains them down to $200K to get them off his back, the collection agency keeps 60% and I get the rest, $80K. And voilà! I can buy myself a new luxury car and have money left over for the insurance premiums!

2

Different collection agencies have different procedures… and I know that laws vary somewhat from state to state or country to country. So this is based on my experience with a collections company trying to collect from deadbeat clients.

  1. The collection agency doesn’t try to establish beyond doubt that the charge is authentic. However, they do ask for copies of invoices, contracts, proposals, etc. These help them in the collection and may also stipulate things like finance charge rates, late payment fees, etc. that they should be assessing.

  2. The collection agency makes the Company X sign a contract. This contract takes four pages to say “I won’t collect the debt directly, and I won’t try to have anyone else collect for me.” If you did pay Company X, it’d be up to them to tell the collections agency to stop collections.

  3. It depends. When the agency pays Company X up front, this is called “factoring.” More often, the collection agency receives the money, keeps their fee and pays the rest to Company X.

  4. You don’t really have any recourse. The collection company will take any evidence you offer and contact Company X. It’s up to Company X to choose whether they still want to pursue you. (So here’s a real example: A customer tells the agency “It was a verbal contract and they overcharged me. I’m not paying.” Collections company forwards that e-mail to me. I responded with “Here’s my e-mail to the client with the range of estimated cost. And you see that the actual cost was near the bottom of the range in my written estimate.”)

Ultimately, though, all a collection agency can do is ask for payment. They can’t just go in and take payment without a legal judgment issued by a court. For small amounts, this may go to small claims court, but a larger amount (like the Bill Gates example) would be in a real court with real lawyers. The judge will ultimately decide whether a real obligation to pay exists and may grant a judgment to coerce payment. Even then you might not get paid.

3

[quote=“Arnold_Winkelried, post:1, topic:533687”]

[li]Suppose I think I can prove to the collection agency that I don’t owe any money, but the collection agency says my proof is invalid for some reason, what recourse do I have?[/li][/QUOTE]

A CA has a contract they sign with the business who the person owes money to. In a nutshell, in exchange for $10, you give us the right to collect on this $100 debt. For the CA, if they can get $50, its a win for them.

Basically they “buy” the debt, then try to collect.

I have often wondered if there would be a serious possibility for a mini transaction level collection agency. Kinda like ok, I understand you are marginally employed and love your 60" plasma TV, but how about we get 5-$10 a month, not rack up a bunch of interest, and just get this solved. Get a few dozen debts going on an auto debit or CC and next thing ya know, thousands of dollars a month are rolling in.

I have also heard that some place work on a commission, basically, they try to collect and keep a percentage of any monies collected.

4
  1. Is the debt legit?

The collection agency will generally put the onus on YOU to prove it is in error. You have to realize by the time the debt gets sold, it’s already on your credit report. So you’re suffering, even if you’re correct and you don’t owe, your credit’s being hit, so you want to get it straightened out.

  1. You can pay the company directly if you want. I worked for Accountemps at collection firms and this happens a lot. I’ve never seen a case where they don’t call us and tell us that the debt was settled. Then there is a smaller fee the agency chares and the matter dropped. I’m sure there are more complex cases but I never saw it. Credit agencies want action, not fiddling around with petty sqaubbles.

  2. Some credit agencise buy your debt outright, some do not. It depends. You’re debt is written off by the creditor and they take the tax loss. If the agency then collects it, they original creditor just reverses the write off. Or they should :slight_smile:

  3. If a creditor is harassing you there ARE laws that are very effective. The Fair Debt Collections Practice Act can give you details.

One thing to remember is every case is a bit different. For instance, if you owe money the creditor will try to collect. He can give up write it off, report you to the credit agency and be done. Or he can get a judgement against you and try to collect money. Or he can turn over to the collection agency BEFORE getting the judgement.

A lot depends on the amount and the bank. Years and Years back I worked a temp job collecting for Chemical Bank and when they were bought out they pretty much just threw out a bunch of information records.

This was a disaster because if the person disputed the claim the credit agency had NO WAY to prove it. So if Chemical or the credit agency reported it to the credit agency, and the customer disputed that on his credit report he won. Why? Because Chemical was stupid with their records as they were being bought.

Some agencies due pay commission. This is a great incentive to push and collect.

Unless you live CASH ONLY, you’re not gonna hide from creditors. My favourite was collecting student loans for a bank because there the US Government works with you. If they don’t pay the SS Admin will turn over where you work so we would just simply attach the salary. So student loans are a different ball game

5

But really, unless they go to Small Claims Court all they can do is harass you? (And US law has limits on that harassment).

The real steps are small claims for an order to pay, and then when that fails to get results, small claims again for an order to garnish wages. The probem is finding clients with a stable enough job long enough that it lasts through the garnish order process.

I recall that in the 60’s it was mentioned that some marginal employers fired the employee as soon as they were served a garnish order to avoid the hassles. In Canada apparently that’s not so easy to do nowadays.

6

I’ve sent my deadbeat accounts to several different collection agencies over the years. For my current collections:

  1. The collections agency takes my word that the debt is legit.
  2. Once I turn an account over, I will not deal with the deadbeat in any way. If (s)he shows up at my business, (s)he is asked to leave.
  3. The agency I use sends me a check for my (pitifully tiny) end of the settled debt; they keep the lion’s share.
  4. Hasn’t happened to me yet. I make certain my complaint is legit prior to sending the account to collections.
7

This may be more of a jurisdictional question. For example, in jurisdictions with a Personal Property Registry, your second order isn’t necessary–you simply file the first order with the court, and that allows you to register a writ at PPR. The writ then allows you various collection methods; examples would include seizure of real and personal property, and garnishment (which can involve more than just wages). But a second trip to Small Claims generally wouldn’t be necessary.

Note that exemptions and limitations do apply to seizures and garnishments–the debtor generally must be able to continue keep some assets and to live and work on garnished earnings.

8

Yes, there are many and varied routes. In Canada, for example, people with too much debt but regular income usually end up before a judge for abitration in a process called (IIRC, depending on province) “Orderly Payment of Debts”. They figure out how much you need to live, and what assets, and take the rest. Creditors accept X% of debt owed. It’s an alternative to actual bankruptcy.

Here, IIRC from information from others, first you need a judgement from Small Claims. Once that is established, and the debtor still doesn’t pay, you need to apply for an order to garnish. It’s not automatic with the debt, but if the guy doesn’t pay, it’s pretty mechanical. The trick in the big city is figuring out whre he works.

Not sure what the process is to seize the debtor’s assets, but there is such a process. You get an order, then get the sherriff and some bailiffs, IIRC, to come in and take whatever’s in the house that is saleable. (Government officers, it’s not a free-for-all) Not familiar with this, but it does not often get used - usually people in that situation settle or do not have the assets.

–

Google Peter Pocklington, who having exhausted others’ tolerance in Canada, left for California to fleece the American market. he ripped off a number of people, and now I believe is facing charges there. One party in a judgement against him, because he hid his assets, got an order to go in and pick up whatever they could from his extensive art and memorabilia collection. It was prime news in Canada because he was the guy who used to own the Edmonton team Wayne Gretzky played for.

But to answer another question, if it goes to small claims court, that’s your opportunity to argue you do not owe the debt. If you lose that, you owe. Better have all your ducks in a row. I’m sure the judges have seen every trick in the book.

9

As I said, this can depend on jurisdiction, since Canadian collection law, and collection agencies, fall under provincial jurisdiction. Here, for example, is the layperson’s guide to how the Small Claims procedure and enforcement processes are done in Alberta. (Warning: large PDF.) Note in particular the section “Enforcing Your Judgment in Alberta,” starting on page 24; which runs down the paperwork, garnishment and seizure processes, and what is exempted from seizure and/or garnishment. Other provinces and states may have similar guides. Might be worth looking for the one applicable to your jurisdiction, so you understand exactly what is involved.

10

They can’t really do that in the U.S., provided that you notify them in writing that you dispute the debt within so many days of their first contact with you. (I think it is 30 days, but could be longer or shorter). At that point, at least in theory, they are supposed to stop contacting you until they obtain and provide you with some form of verification of the debt.

11

It depends on the policies and procedures of the agency itself. As a lawyer, I am certainly allowed to represent clients in their dealings with collection agencies (and I can legally make the agencies stop harassing my clients, which I suppose is what my clients feel is the biggest advantage in retaining me). As you might guess, in my dealings with collection agencies, I speak with agency supervisors and managers–I don’t deal with their “boiler room” callers–and along the way, I’ve learned that the two options you’ve laid out above are both used by various agencies.

Here’s another method I recently discovered: While dealing with a large collection agency on behalf of a client recently, I discovered that for some large creditors who always have overdue receiveables owing, this particular agency is retained on an ongoing basis. Creditors apparently pay a standard, set fee (monthly? not sure); and in return, the agency collects the overdue debts and forwards them in full to the creditor. It sounded odd to me, but this arrangement obviously works to the satisfaction of both the creditor and the agency.

12

Don’t forget the part where your outstanding debt and attempts to collect is added to your credit report for all future creditors to see that you’re a bad risk. Companies live and die by credit; to not be able to open accounts with vendors is a very limiting thing for them.

Another point here is (in my experience working in accounting departments) how long a company will let things go before turning a debt over to a collection agency. In my experience it’s been between six months and a year or two; if you’re under a certain dollar value, bad debts will often simply get written off because there comes a point where continuing to try to collect just costs the company money. This has its own consequences (the account is almost always closed long before this happens, and you may report to future credit checks that this company is not a customer in good standing with you, which may affect their ability to open accounts with other companies). I haven’t actually seen this process, but I’m making an educated guess that it will also be reported to the credit reporting agencies.

I tend to not have a lot of sympathy with people fighting debts with collection agencies because you would have already had lots of time and opportunity to fight about it with the original company, when they dunned you every month for the last year. Most of the companies I’ve worked with have been fairly reasonable, too, if there were discrepancies and problems with the outstanding amount, giving you ample opportunity to fax over your copies of invoices, etc. I have a feeling what gets you into collection agency hands is simply ignoring a debt, hoping it will go away.

13

I tend to not have a lot of sympathy for collection agencies, because most of the ones I’ve dealt with are pond scum. They ignore the law and frequently threaten elderly/disabled alleged debtors with jail, foreclosure, eviction, and any other damn thing they can make up. They also employ shoddy process servers who sometimes claim to have served people without ever actually doing so, expect the Courts to be on their side, and get amusingly flustered when challenged on simple things…like how a corporation, including a collection agency, must be represented by counsel in the courts of this state. Or when you show up at docket call, announce ready for trial, and object to their pleading for a continuance because they showed up with 40 cases on the docket and no witnesses.

I don’t do much of that kind of work. Often it’s more efficient to refer the cases out for a bankruptcy…but I do enjoy frustrating those folks when I can.

14

I’m fairly lukewarm on whether or not collection agencies are pond scum. They’re not in business to make friends; they’re in the business of getting money out of people who don’t want to pay it. I can see where they would get into some…unethical habits, given the type of people they often have to deal with (but I do agree that they should stay within the law regardless).

15

During the 1990s I read an article (Inc Magazine?) about “A Billionaire You Have Never Heard Of”. He ran a collections agency. He got his start buying debt for pennies on the dollar in the midst of the 1980s S&L crisis. He first worked the phones from his kitchen table.

He developed a unique business model. He only hired people who had never ever been involved in collections. And he instructed them to be… nice. By being polite, they were able to persuade debtors to pay his company first, rather than the obnoxious ones. After a while, certain other companies adopted his strategy. Obviously, if they are unsuccessful, they need only sell the debt to a meaner agency. Anyway, some collections agencies can be very friendly – they want to be your pal!

Those receiving constant phone calls from debt collections agencies might consult with the Fair Debt Collection Practices Act.

My next door neighbor was once called about a half dozen times in a single day asking for somebody who was a complete stranger to him. When he handed me the phone, I wrote down all the particulars, including the name of the caller and the collection agency. Then I told them to Not. Call. This. Number. Again. That ended the problem.

16

Thank you for all the information. This was prompted because I got a call the other night from someone asking “do you know the person who lives to you? would you mind going to see if they are home?” Those calls really irritate me. In my experience they are typically collection agencies. When I asked the lady on the other end of the phone “who are you, what company are you with” she refused to tell me. So I told her I would go check on my neighbour for a fee and asked for $100. She didn’t want to pay me.

I realize that they are plenty of deadbeats out there, and I can’t think of a better way, but reading this

slightly bothered me - an unscrupulous business could easily take advantage of this.

17

There are some companies that try to collect debts that are so old you no longer legally have to pay them - they are 7 years old (I think it’s 7) or older. Of course they don’t tell you that you are no longer legally required to pay those very old debts.

18

That doesn’t seem quite right; if that was how it worked, no business would ever pay their bills and just let them go seven years old.

19

I think you’re referring to the applicable statute of limitations. That varies by jurisdiction, when the statute begins to run, type/secured status of debt, and possibly other factors. You’d need to consult an attorney licensed in the appropriate jurisdiction.

20

Aside from collection agencies, there are legal means that can be used to collect the debt long before seven years pass.

In your jurisdiction, Cat Whisperer, limitations in debt matters are only two years, generally speaking. Few creditors won’t make attempts to collect during that time, and each attempt resets the clock to zero. Because of this resetting of the clock, it is theoretically possible for a debt to remain collectible for seven (or more) years, although most creditors will either sell it, write it off, or litigate it before that much time passes.