Collection Agency Definition Examples Us Regulations Process

Collection Agency Definition

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Creditors and lenders consider involving a collection agency when all their efforts to get the payment back fail. In short, these agencies act as the last resort for financiers to get their money back from debtors or customers. However, they must act according to the restrictions of different federal and state regulations.

Key Takeaways

A collection agency is hired by creditors/lenders to ensure the latter get back their outstanding dues from defaulters.An agency is hired when a creditor makes sufficient attempts to recover the amount and still fails to get back the amount.They are covered under the regulations of the Fair Debt Collection Practices Act.They may carry out various activities to collect the funds, such as calling the borrowers over the phone, mailing them, communicating with their relatives, or directly appearing at their address.

How Does A Collection Agency Work?

A collection agency is also referred to as a debt collection agency, which helps lenders and creditors get back their outstanding dues. Whether it is a bank awaiting repayment, which is being delayed too much or for which default is expected, or a seller or vendor waiting for the payment for the goods and services sold to customers, these agencies help recover all kinds of outstanding dues.

When lenders and creditors put all their efforts into recovering their debts and fail to get back the amount, they have to have an entity to help them recover it. Though they have the option of having an internal team of experts to bring their money back, they prefer hiring third-party agencies to take care of the debt collection.

As soon as the creditors report defaults to the credit bureau, the latter transfers the matter to a collection agent within three to six months of the default declaration. The entities may ask borrowers to pay back the amount in equal proportions or all at once. The agency can call the borrowers, email them, or directly knock at the door to settle the debt.

When the debtors repay the lenders or creditors, given the efforts put in by the agency, the financiers pay the collectors in the form of a percentage of the amount the debtors repay.

There are instances where borrowers/debtors do not repay the lenders or creditors despite the agencies’ involvement. In that case, the credit bureau assigns the former the lowest possible credit rating, making them ineligible to apply for any loan or credit in the future.

Regulations

The FDCPA guides the actions of a collection agency in the USA. However, the rules cited here do not apply to the in-house collectors’ team. The regulatory body imposes restrictions to keep these agencies under control while planning their debt collection agencies.

Though lenders/creditors hire agencies for debt collection, the regulation does not allow the latter to collect a debt labeled as “uncollectible,” which means the debtors have already filed for bankruptcy or aren’t traceable. They can ask for repayments but can’t threaten the borrowers, use violent measures, or adopt unethical means of doing the same. The collectors, however, can legally seize debtors’ assets if the agency has won a lawsuit against the defaulter.

Examples

Let us consider the following examples to understand when and how collection agencies work:

Example 1

Startup owner Roger took a loan of $1,000 from private lender Stella for a two-year tenure. He paid the first two installments on time and then missed the next two. When the lender tried to contact him, he started avoiding her calls and messages. Thus, she took the matter to the credit bureau immediately. The bureau, then, assigned the recovery task to a collection agency for small businesses.

The collection agency called him, but the attempts failed. Then, they contacted his peers, friends, and family members to trace him. Finally, Roger, who thought he could escape his repayment, had to pay back the amount along with interest.

Example 2

One of the most renowned debt collection agencies in the United States is the AARGON Agency, established in 1996. It offers comprehensive services to ensure recovery of the outstanding debts for individual creditors or companies. It uses highly advanced technology to monitor the debt collection tasks and provide updates to creditors/lenders as and when required. Plus, the AARGON collection agency connects multiple call centers in different US time zones. This helps them receive the latest recovery updates from trained collectors across the nation.

Dispute Letter

A debt dispute letter is a document asking collection agencies for proof of debtors owing an amount to respective creditors. The federal law allows 30-day time for consumers to respond to the letter. A copy of the letter is sent to the credit rating agencies. This is to ensure the customers’ credit scores remain unaffected until the letter is answered.