A collection agency is a third-party company hired to follow up on debts by various account holders. A collection agency may also purchase debts which have remained uncollected for a longer time from the creditor for a minimal amount and then recover these for profit. They often earn by commission or through a pre-arranged fee.

They also provide reports to the credit bureau, where a database of outstanding accounts is logged and filed, to also help other agencies and financial institutions. The delinquent account appears on the credit bureau's record for a period of seven years.

How do collection agencies work?

They manage by contacting the debtor either by telephone calls or business letters.

LETTERS

Most collection agencies have a standard computer generated letter containing a simple reminder of the delinquent account. These letters are impersonal, yet not evasive, as they are sent to a lot of account holders and are often sent in the most discreet way possible. Sometimes the envelope does not even contain the company's identity, as debts may often prove embarrassing for some people. How the letter is phrased and how it is carried out is very important as this will affect the kind of response sought from the debtor. Sometimes a second letter or a follow up letter is also necessary.

PHONE CALLS

When letters fail to attract the attention of the debtor, collectors then make necessary phone calls. There are groups of people hired by agencies to handle different accounts and they work all day by calling each and every person in that account. As always, tact and discreetness is demanded from these collector agents. There usually is an SOP for all types of phone calls. When a collector agent makes progress by reaching someone who isn't the debtor, the agent must not disclose the nature of the call, except to leave a phone number and a request for return call. When a collector agent successfully contacts the debtor, agents are required to properly introduce themselves and then state the nature of their call. The collector must be able to make arrangements with the debtor, and if a commitment of payment is not reached, any information he or she can extract from the debtor will also be useful in evaluating what the next action will be.

What can collection agencies not do?

- They do not have legal rights to seize assets, without a filed lawsuit and a verdict. Lawsuits, by the way, are only seen as last resort and if the debtor remains firm on his stand to deny payment.

- They do not have the legal right to disclose any debt in public. They are only allowed to disclose these in official credit agencies.

- They do not have the power or the legal backing to have someone be fired from work.

- They are prohibited from engaging in any verbal or physical threats.

Collection agencies are regulated by a trade commission and by-laws may depend from state to state.