The debt recovery process pursues payments owed to a creditor. Whenever a debtor defaults on payments the process is initiated. In the initial stages, only the creditor and debtor are involved. If an amicable agreement is not reached to settle the debt a debt collection agency may be called in. Debt collection agencies are companies that specialize in debt recovery. Most debt collectors act as agents of the creditor and receive payment for debt recovery.
Types of debt collection agencies.
Although debt collection agencies seek to recover debt, they operate in different ways. The three main types of debt collectors include
First-Party Agencies
They are involved early in the debt recovery process and are part of the original credit contract. First-party agencies act as departments or subsidiaries of the creditor. The agencies conduct the recovery process for the first few months and have a greater incentive to maintain good customer relationships. However, if the recovery fails, the agency can pass the debt to a third-party agent.
Third-Party Agencies
When recovery proves to be difficult, creditors can assign accounts directly to a third-party agent to pursue payment. The agencies are not a party to the original agreement but they make their revenues from recovering debts. Third-party agencies have different ways to charge for their services. Service Level Agreements between the creditor and the agency stipulate all the terms of service including payment. For most agencies, they take a ‘pot fee’ also known as the potential fee upon successful collection.
In some circumstances, the fee is charged without collection, for example, when the creditor cancels all collection efforts before the debt is recovered. Nonetheless, most third party agencies operate on a ‘No Collection-No Fee’ basis. Some agencies charge an optional pre-collection service fee to boost recovery efforts by increasing urgent letters and instructing debtors to pay up or risk collection action and negative credit report
Debt Buyers
Some debt collection agencies buy debts. They purchase the debts from creditors for a portion of the value and pursue the full balance including the interest accrued as par the original credit agreement. This form of recovery gives the original creditor immediate revenue. Although the revenue is lower than the value of the debt, all recovery efforts and risks of debt collection are transferred to the debt buyer.
The value of the debt or the service fee charged to recover it depends on several factors;
The type of debt:
There are numerous types of debts ranging from credit card debts, personal loans, payday loans and auto loans to medical debts and student loans. Each debt is different when it comes to recovery and thus collection charges vary
Age of the account:
Old debts are harder to collect hence the charges on recovery match the efforts used.
Recovery attempts:
Debts that have been through several unsuccessful recovery attempts are low in value and if charged the service fee is high.
Nonetheless different debt recovery agencies use different ways to value their services or purchases.
The Recovery Process
When there is a default on a payment, first-party agencies pursue the debt. Their objective is to reach an agreement with the debtor on payment and follow up till the amount is recovered. When an agreement is not reachable, third-party agencies are contracted the task of recovering the debt. They make calls to instruct debtors on payment, send letters and if all fails they seek legal action. The debtor is kept up to date on each step.
The process of debt recovery has seen numerous changes and laws guide the entire practice. Some agencies have been accused of using threats to coarse debtors into paying up while others are not transparent through the entire process. Misinformation has led numerous people to fall victim to the ills of debt recovery. Identity theft has also led numerous people to be targeted erroneously. Despite all the efforts, not all debts are recoverable. Debtors who are unable to pay what they owe can file for bankruptcy. Moreover, upon the death of a debtor, a claim can only be made on the deceased person’s estate.
Debt recovery is a complex process that takes time and consumes resources. It’s important to contact a reputable debt collection Melbourne agency to pursue your debts.