Matthew Schroeder, writing here under the pen name Specificity, is the former CEO of Greenbrier Financial Services / Greenbrier Collections, Inc (www.gfscollect.com). Since this was a very small company, he was a working CEO who did sales and even spent a fair amount of time each week on the phone bank making collection calls and designing mailings. Currently, he is an accountant pursuing an MBA from the University of Wisconsin. He has also been on the other end of the collection cycle and has battled bill collectors successfully and unsuccessfully.

This is part 1 of a series that is designed to help you understand what a collection agency is, why your creditor has hired them, how you can protect yourself, and what you can do to keep collection agencies out of the picture in the future.

What is a collection agency?

A collection agency is a third party contracted to expedite the collection of overdue accounts. There are typically two ways in which they operate: The most common is by contingency fee. Greenbrier Collections charged 20-30% of the amount collected depending on what kind of debt we were dealing with. That means that if a debtor owed one of our client physicians $100 and they made a payment of $50 on it, we got a $10-15 commission. Debt collecting is a highly competitive and often low margin business. In part 3, we discuss how this can work to your advantage.

Another way that collection agencies collect debt is to buy the debt from the creditor. In one instance, our company (I was not one of the owners) bought $105,000 of credit card debt for $6500. The debt was ours and we could keep 100% of what we could collect. The credit card companies were ready to wash their hands of it and move on. Debt buying is a rapidly growing business and parts 2 and 3 of this series will deal with this situation as well.

Most agencies are third party and that is what this article focuses on, but one more type of agency is called a “first party agency” because it is merely a subsidiary of the original creditor. A hospital in Ronceverte, WV sent a disputed account of mine to a collector in Chicago. A little research showed that the “collector” was merely a department of the parent company that owned the hospital. The different name and address were designed to elicit the fear of the dreaded collection agency.

What can a collection agency actually do?

That fear, which is mostly unfounded, is half the reason that collection agencies are as successful as they are. According to Cardreport.com, one of the reasons people feel compelled to pay debt collectors is “greatly exaggerated ideas about what collectors are (legally) capable of doing.” The major tools used by debt collectors are letters, phone calls, and reporting to the credit bureaus.

The purpose of the letters and phone calls is to create a sense of urgency in the debtor to pay this debt. Heretofore, this debt was between you and the creditor, but this third party voice talking to you about it is strange and can cause some panic. No matter what they say or imply, they cannot touch your bank account nor garnish your wages nor put a lien on your home without the creditor taking you to court. Furthermore, third party agencies are governed by the Fair Debt Collection Practices Act (FDCPA), giving the debtor a lot of rights which are discussed in subsequent articles.

The other major piece of legislation governing collectors is the Fair Credit Reporting Act (FCRA). Collection agencies that report to the credit bureaus must comply with the FCRA. Not all collection agencies report to the credit bureaus, even if they say they do. A collection account on your credit report never goes away; it merely gets marked “paid.” Once a debt collector reports your account to the credit bureaus, a significant amount of damage has been done that will not be completely undone even if you pay the account in full. The account will come off your report 7 years from the original date of delinquency.

Part 2 of this series will talk about what you can do if you’re being hounded by a collection agency for a debt you do not owe.  Part 3 will detail ways to slow the collection process down on debt that you do owe.