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Collection Agency



Definition

A Collection Agency is a company employed by lenders or creditors to recover funds that are past due or from accounts that are in default. These agencies earn a fee or percentage of the total amount owed, based on their agreement with the creditor. This action usually starts after creditors fail to receive payment for an extended period, typically 60 days or more.

Phonetic

The phonetic pronunciation of “Collection Agency” is: /kəˈlɛk.ʃən ˈeɪ.dʒən.si/

Key Takeaways

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  1. A collection agency is a business that pursues payments of debts owed by individuals or businesses.
  2. They work as agents of creditors and collect debts for a fee or a percentage of the total amount owed.
  3. While they are regulated by several laws to ensure ethical practices, interacting with a collection agency can sometimes negatively affect a person’s credit score.

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Importance

The term “Collection Agency” is important in business and finance as it represents organizations hired by companies to pursue unpaid debts. When individuals or businesses fail to meet their debt obligations, the owed party often turns to these agencies to recoup financial losses. Collection agencies play a crucial role in ensuring the smooth flow of the credit system, by enforcing personal and corporate financial responsibility and mitigating the overall risk of lending. Their presence often acts as a deterrent to potential defaulters, thereby fostering a culture of timely payments and financial discipline. Hence, understanding the role of collection agencies is critical to both creditors and debtors in managing debts and maintaining a healthy economy.

Explanation

A collection agency primarily serves the purpose of recovering funds that are past due, or from accounts that are in default. Often employed by businesses and various lending agencies, a collection agency comes into play when efforts by the original creditors to get the debtor to pay off their outstanding debts have not been successful. Creditors often sell these debts to agencies at a lower price than the actual amount owed, which is usually done when it turns out to be costlier for the original creditors to collect the debt themselves. The function of a collection agency is essentially to act as middlemen. They take up the responsibility of tracking down debtors, making them aware of their outstanding debts and ensuring that these debts are paid off. For this effort, collection agencies are typically paid either a flat fee or, more often, a percentage of the total amount collected. Some collection agencies might be even more aggressive in their practices, depending on the type of debt and the policies of the agency itself. So, while their task may seem straightforward, their practices have a considerable impact on debt recovery, credit policies and even the economy at large.

Examples

1. Credit Card Debt: One common real-world scenario involves credit card companies. If a credit card holder consistently fails to make payments on their outstanding balance, after a certain period of time, the credit card company might sell that debt to a collection agency. The collection agency will then attempt to recover a portion or all of that debt from the debtor, which usually includes additional fees.2. Medical Debt: A patient may have undergone a surgery or received medical treatment but has not paid the hospital or medical center for the services provided. After repeated unsuccessful attempts to collect payment, the hospital may turn over the unpaid debt to a collection agency. The agency will then pursue the patient for the amount owed.3. Student Loans: In another scenario, a student might have taken out a loan to pay for their education. If they neglect or are unable to make payments on this loan after they’ve finished school, the loan provider could hire a collection agency to recover the money. The agency will then contact the former student to sort out a plan for repaying the debt.

Frequently Asked Questions(FAQ)

What is a Collection Agency?

A collection agency is a company hired by lenders or creditors to recover funds that are past due or from accounts that are in default.

What services do Collection Agencies provide?

Collection Agencies mainly offer debt recovery services. They use letters, phone calls, and other methods to contact debtors and collect the outstanding debts.

How does a Collection Agency work?

Collection Agencies operate by purchasing or managing bad debts from creditors and then employing various means to try and collect the outstanding amount. This can involve negotiating payment plans, locating debtors, and even legal action.

Can a Collection Agency sue for debt?

Yes, if debtors do not respond to collection attempts or refuse to pay, a collection agency has the right to sue for the debt.

How long can a Collection Agency pursue a debt?

The length of time an agency can pursue a debt varies by country and state, but it is typically between 3 – 6 years. This is referred to as the statue of limitations.

How can I stop a Collection Agency from contacting me?

Legally, you can request that a collection agency stop contacting you by sending a written letter. However, this doesn’t waive the debt, and the agency still has the right to sue for the money owed.

What to do if a Collection Agency is trying to collect a debt I don’t owe?

If a collection agency is pursuing a debt you believe you don’t owe, it’s important to not ignore them. Ask for the agency to verify the debt in writing, consult with a consumer lawyer or contact your local consumer protection agency for advice.

Can a Collection Agency affect my credit score?

Yes, typically, having a debt that’s gone to collection can negatively impact your credit score. This is because your payment history is a significant factor in the calculation of your credit score.

Do Collection Agencies buy debt?

Yes, Collection Agencies often buy debt off original creditors for a fraction of the face value. They then attempt to collect the full amount of the debt, with the difference being their profit.

Related Finance Terms

  • Debt Recovery
  • Outstanding Debts
  • Creditors
  • Delinquent Accounts
  • Debt Collector

Sources for More Information


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