How Collection Agencies Work

How do collection agencies earn money?

The primary revenue stream for collection agencies is commission income generated collecting debts owing to others. Some collection agencies also collect unpaid accounts they have purchased as a secondary revenue stream. A collection agency that has purchased your outstanding account steps into the shoes of your original creditor. When a collection agency has purchased your unpaid account it is entitled to 100 percent of any monies it recovers from you.

From your perspective, if you are receiving collection calls it really doesn’t matter whether the collection agency owns your debt or if it is collecting your account on behalf of a creditor.

Collection agencies must be licensed in every province and territory where they contact consumers to make payment demands. Some provinces, including Ontario and Alberta, require debt buyers to hold a collection agency license. Collection agencies are restricted to making written and verbal demands for payment. They are prohibited from showing up in person at your residence or your workplace, or following you in public.

It is illegal for a collection agency to disclose the existence of a debt to anyone other than the person legally responsible for the debt.

A creditor can only assign a specific account to one collection agency at any given point in time.

Suing an unpaid account

A third, but relatively minor, revenue stream for collection agencies is income generated from suing debtors. A small percentage of accounts that creditors assign to collection agencies are sued. When I was managing the legal department at some of Canada’s largest collection agencies only one out of 10,000 accounts, or sometimes one out of 100,000 accounts, might be sued.

There are two scenarios where you are sued over an unpaid account. Firstly, your creditor might decide to sue you in circumstances where your account has not been assigned to a collection agency. Secondly, your account has been assigned to a collection agency and your creditor has provided your collection agency with written authorization to sue you.

Regardless of which entity is suing you, it costs money to sue you. This includes court filing fees, and labour costs associated with preparing court documents commencing a lawsuit, attending pre-trial conferences, attendance at trials, as well as overhead costs associated with managing a legal department. If you are sued either your creditor or the collection agency it has hired to sue you has to pay for this.

The bottom line is this. Both creditors and collection agencies have large inventories of unpaid accounts.  If they sue too many files indiscriminately they could actually lose money.

The decision to sue a particular file is based upon cherry picking the best files to sue. The ideal file to sue is an unpaid account where the debtor owns real property in their own name and the outstanding balance is a minimum of $10,000. It might also be attractive to sue you if you have a high-paying salaried job, you work for the government, or you have a good union job.

Neither a collection agency, nor its creditor-client, will be particularly interested in suing a debtor where other creditors have already obtained judgments against them, or where the debtor is already paying court-ordered child and spousal support.

Neither creditors nor collection agencies sue the majority of the unpaid accounts they are trying to collect. It costs money to sue an unpaid account and there is no guarantee if a debtor is successfully sued that a penny will be recovered from the debtor. To maximize net recoveries only a small percentage of unpaid accounts are actually sued.

To optimize net recoveries, the lion’s share of these unpaid accounts will be assigned to collection agencies for collection on a commission basis. A collection agency does not receive a penny from its creditor-client if it does not recover monies from you.

The guiding principle for collection agencies is collecting the low hanging fruit. Profitability for collection agencies is a delicate balance between collecting the most money at the lowest possible cost.

Frontline collectors

Frontline collectors at collection agencies are often younger, with little education. Newly hired collectors may undergo a two-week in-house training course.

Each month an individual collector is assigned a few hundred accounts and they may be given a quota in terms of the amount to collect. A good collector can make their quota without collecting a penny from you. They do not have the authority to sue you. It is up to a creditor to sue you.

If you are receiving collection calls try not to take it personally. The collection agency and the collector have a job to do. If they are collecting your unpaid account on a commission basis they will not receive any monies if you do not make any payments on your outstanding account.

A collector’s job can best be described as a commission sales position. Their job is to persuade you to pay your unpaid account instead of spending the money elsewhere. They will encourage you to borrow the money from family or friends. It is a matter of having you prioritize paying this unpaid account. 

Most collectors attempt to achieve this objective by hounding you. They want to make you feel uncomfortable when you are not paying your outstanding account. The message is simple. These painful collection calls will only stop when you either pay your account in full or settle your account.

Life cycle of an unpaid account

The first six months your account is unpaid

For the first six months that your account is unpaid you should anticipate receiving collection calls from the in-house collection department at your original creditor.   While provincial law provides some protections from abusive conduct committed by collection agencies, original creditors are exempt from these laws. Some creditors might assign your outstanding account to a collection agency as early as three months. Most creditors, however, do not assign unpaid accounts to a collection agency until such time that no payment has been made for at least six months.

No payment on your account for six months

A number of scenarios arise if no payment is made on your account for six months. Firstly, some creditors routinely sell their portfolio of unpaid accounts when they are delinquent for six months. Secondly, creditors might entertain one time lump-sum settlement offers for less than the full balance.

If you have an unsecured consumer debt and no payment has been made in six months your creditor might be prepared to accept a one-time lump sum payment for less than 100 percent of the outstanding balance as settlement in full. In this scenario you can make a verbal settlement offer to the collector responsible for your account. You should insist on receiving a satisfactory settlement letter before you make your lump-sum payment.

If you are attempting to negotiate a one-time lump sum settlement on your outstanding account the longer the account has not had a payment the more generous the discounts that might be available on a negotiated settlement.

In some scenarios, you can avoid paying a debt altogether due to the expiry of a limitation period.

If your unpaid account does not appear on either a TransUnion or Equifax Canada credit report then there is no point making a payment unless you feel a moral obligation to do so.

Multiple assignments over time to different collection agencies

At some point your creditor might assign your outstanding account to a collection agency. In the collection industry this is referred to as a first assignment. A first assignment is typically for six to twelve months at the end of which your creditor will recall your account. Your creditor will likely reassign your unpaid account to a different collection agency. This is referred to as a second assignment. At the end of several months, your creditor will recall your account and assign it to a third collection agency. This is referred to a third assignment. This process may be repeated several times.

When a creditor recalls an unpaid account from a collection agency it might have its own in-house collectors attempt to collect the account for a period of time before reassigning the account to a different collection agency.

Your account may be sold to a debt buyer

At some point your original creditor, the firm that provided you with goods, services, or credit, might decide to sell your account. The company that purchases your debt is referred to as a debt buyer. A debt buyer steps into the shoes of your original creditor. When your original creditor sells your account, and thousands of other accounts, it might do so for pennies on the dollar.

There are two distinct types of debt buyers. Some debt buyers are collection agencies and their primary source of income is commission revenue generated from collecting the debts of others. There are some debt buyers that do not collect the debts of others. This latter category of debt buyers may employ its own in-house collectors or it may hire collection agencies to collect its inventory of unpaid accounts.

Understanding how collection agencies operate

Consumers who understand how collection agencies operate acquire several advantages. Firstly, you should not be afraid of a collection agency as you might otherwise be. Secondly, you might be in a much better position to eliminate your debt in a more optimal manner.