Editing Debt collection (section)

==Collection agencies==

[[File:Foreclosedhome.JPG|thumb|House in [[Salinas, California]], under foreclosure, following the popping of the [[United States housing bubble|U.S.]] [[real estate bubble]]]]

There are two principal types of collection agencies. First-party agencies are often subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. [[Debt buyer]]s purchase the debt at a percentage of its value, then attempt to collect it. Each country has its own rules and regulations regarding them.

===First-party agencies===
Some collection agencies are departments or subsidiaries of the company that owns the original debt. First-party agencies typically get involved earlier in the debt collection process and have a greater incentive to try to maintain a constructive customer relationship.<ref name = "Legrady">{{cite journal|last=Legrady|first=Paul|title=Creditors Exercising Options For Receivables Management|journal=Business Credit|volume=107|issue=8|pages=62–63|date=September 2005}}</ref> Because they are a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies.

These agencies are called "first-party" because they are part of the first party to the contract (i.e. the creditor). The second party is the consumer (or debtor). Typically, first-party agencies try to collect debts for several months before passing it to a third-party agency or selling the debt and writing off most of its value.

===Third-party agencies===
A collection agency is a third-party agency, called such because such agencies were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications. This however is dependent on the individual [[service level agreement]] (SLA) that exists between the creditor and the collection agency. The agency takes a percentage of debts successfully collected; sometimes known in the industry as the "Pot Fee" or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance; very often this fee must be paid by the creditor if they cancel collection efforts before the debt is collected. The collection agency makes money only if money is collected from the debtor (often known as a "No Collection - No Fee" basis). Depending on the type of debt, the age of the account and how many attempts have already been made to collect on it, the fee could range from 10% to 50% (though more typically the fee is 25% to 40%).<ref name = "Legrady" />

Some debt purchasers who purchase sizable portfolios use a Master Servicer to assist in managing their portfolios (often ranging in thousands of files) across multiple collection agencies. Given the time-sensitive nature of these assets, an advantage of this technique is that it gives the debt purchaser more control and flexibility to maximize collections. Master Servicing fees may range from 4% to 6% of gross collections in addition to collection agency fees.{{Citation needed|date=March 2023}}

Some agencies offer a flat fee "pre-collection" or "soft collection" service. The service sends a series of increasingly urgent letters, usually ten days apart, instructing debtors to pay the amount owed directly to the creditor or risk a collection action and subsequent negative credit report. Depending on the terms of the SLA, these accounts may revert to "hard collection" status at the agency's regular rates if the debtor does not respond.{{Citation needed|date=November 2022}}

In many countries there is legislation to limit harassment and practices deemed unfair, for example limiting the hours during which the agency may telephone the debtor, prohibiting communication of the debt to a third party, prohibiting false, deceptive or misleading representations, and prohibiting threats, as distinct from notice of planned and not illegal steps.

In the [[United States]], consumer third-party agencies are subject to the federal [[Fair Debt Collection Practices Act]] of 1977 (FDCPA), which is administered by the [[Federal Trade Commission]] (FTC).

In the United Kingdom third-party collection agencies that pursue debts regulated by the [[Consumer Credit Act 1974|Consumer Credit Act]] must be approved and regulated by the [[Financial Conduct Authority]].<ref>{{cite web|url=https://api.parliament.uk/historic-hansard/commons/1973/nov/14/consumer-credit-bill|title=CONSUMER CREDIT BILL (Hansard, 14 November 1973)|date=14 November 1973|work=[[Hansard|Parliamentary Debates (Hansard)]]|access-date=6 October 2009}}</ref>

===Purchasers of debts===
Debt collection may involve the sale of a debt to a third party company, sometimes referred to as a "[[Factoring (finance)|factor]]" or "[[debt buyer]]". The debt buyer purchases accounts and debts from creditors for a percentage of the value of the debt and may subsequently pursue the [[debtor]] for the full balance due, including any interest that accrues under the terms of the original loan or credit agreement. The sale of debts and accounts provides a creditor with immediate revenue, albeit reduced from the face value of the debt, while shifting the work and risk of debt collection to the debt buyer.<ref>{{cite journal|last=Palmeri|first=Christopher|title=Debt Collection Puts on a Suit|journal=[[BusinessWeek]]|issue=3959|pages=86|date=14 November 2005}}</ref>

In the United States during the [[savings and loan crisis]] of the 1980s, there was a huge resurgence of [[foreclosure]]s and written-off accounts, similar, although on a much smaller scale, to that of the [[Great Depression]]. Some financial innovators decided that there may be some profit in buying up delinquent accounts and attempting to collect a small portion of the amount due. They purchased these accounts from the original lenders at pennies on the dollar, and turned profit by collecting a fraction of what was owed by the debtor.

Some states have specific laws regarding debt buying. Massachusetts requires companies that buy debt to be licensed while California does not.<ref>{{cite web|title=Debt-Buyer Licensing Requirements|url=https://www.collectionlicenses.com/debt_buyer_requirements/|website=Collection Licenses|publisher=Orion State Licensing|access-date=19 January 2018}}</ref>