We have outlined key steps to follow to hire a collection agency before. 

However, we have recently been asked to review several debt collection agency contracts, and have come up with a short list of some items that should be carefully considered. 

What’s in a rate? Most debt collection agencies work on a contingency fee basis, which means you pay no money up front, and the agency retains a percentage of sums collected. Certainly, you want and should have competitive debt collection fees. However, what looks like a great rate may not be all it seems. It is customary for collection agencies to charge a higher rate for accounts that are older, as they normally require a good deal more research, or skiptracing. These days, however, even some newer files (90-180 days in default) need research to find a new phone number of address. Be very careful of contracts that offer an attractive rate, say 25% on more current files but require a higher rate on any file that needs skip tracing. Since approximately 40% of all files will need some sort of research, you could wind up paying much more than you expect. Also, NEVER pay a separate fee for research. It is part of a debt collector’s job, and should be included.

If you contract with an agency on a per file, flat fee basis, be very careful. This approach usually involves paying a small fee on a large number of files upfront. Ask what the agency will do to collect the debt. If they tell you they will send one letter and report it to the credit bureau, is that going to be sufficient to recoup your bad debt? Oftentimes, the flat fee is a teaser, and a high rate kicks in for anything but basic services. 

Credit Bureau Reporting – Reporting delinquent customers to one or more credit rating agencies can be a tool to help recover bad debt. However, it is not without risk. It is only one tool in the debt collector’s toolbox, and should not be a substitute for a persistent and ongoing effort to get you paid. Ask your agency how long they keep a file active, and what (in addition to credit reporting) they do if someone ignores the bill or refuses to pay. If you get the feeling that they simply report the debt and forget about it, keep looking. 

Legal Capabilities – How does your agency handle files referred for legal action? Unless they are attorneys, your colelction agency cannot represent you in court, which means they should have established relationships with attorneys who understand debt collection. Make certain your understand which fees will be your responsibility for, as legal actions can be expensive. 

Also, a collection agency’s job is not done when they refer a file for legal collection. They should be in contact with attorneyand assist with post-judgment collection. Remember the court only awards a judgment, they do not collect the money for you, Make sure your agency works closely with the attorney to identify assets and keep the process moving.

What factors are important to you? We would love to hear.

Want a step-by-step guide to help you hire a small business collection agency? We have it!