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Managing debt collection can be a difficult affair for all businesses. Receiving notification that a debt has been turned over to a collection agency raises a number of significant questions. Should you pay the collection agency? What are the consequences of paying? Additionally, what other options do you have for handling this debt?
Apart from these worrying questions, another factor that emphasizes the importance of understanding the key considerations related to collection agencies is the growth of the global debt collection agencies market. It is expected to reach USD 41.7 billion by 2033 from USD 31.3 billion in 2023, growing at a CAGR of 2.90%.
Paying a collection agency can be a bad move that seriously harms an already precarious financial situation. Therefore, in this guide, we'll discuss the nuances of debt recovery by collection agencies, your rights as a business, alternative options, and more.
A collection agency is a business used by original lenders to retrieve money from past-due or defaulted accounts. Collection agencies collaborate closely with lenders to recover delinquent funds.
When a borrower is 60 to 90 days past due on a loan and the creditor’s internal debt collection team is not able to recover the dues, the creditor frequently hires a collection agency to reduce its losses.
Did You Know? Apart from occasionally employing collection agencies to collect debt on their behalf, creditors also sell debt, frequently for a significant discount on the loan's total value. The collection agency takes over as the new creditor in these situations.
To start the process, the original creditor must notify you when your account is assigned to collections. If this happens, take it as a wake-up call.
The following should be included in the written notice:
To avoid further complications, you must be aware of the following consequences that your business may face while your debt has been transferred to a collection agency.
The credit score of your business will decline as soon as your creditor assigns your debt to a collection agency. These agencies usually report the delinquency to the three main credit bureaus: Equifax, Experian, and TransUnion. An account sent to collection agencies will remain on an Equifax credit report for six years following your last payment and seven years on a TransUnion report.
A low credit score does significant harm to your business. Let’s find out how.
Ignoring a collection agency may result in ongoing fines for interest. Although collection agencies are unable to apply interest penalties of their own for nonpayment, they are able to enforce the conditions of your initial loan and, in certain situations, put on additional fees.
The agency can sue you if collection attempts, emails, and other payment reminders are unsuccessful. Further, if the judge passes the verdict against your business, the collection agency may be able to levy your bank account or garnish your employees’ wages.
Do the consequences of facing a collection agency worry you? Are you not being able to decide whether to pay your debts to a collection agency or not? Let South East Client Services (SECS) help optimize your financial position and streamline your debt payment process. Our expert team is here to help you navigate unprofessional collector behavior and illegitimate debts with precision and ease.
There are many financial implications involved, which can further affect your business’s working capital and operations. To avoid them, you need to understand your rights when dealing with collection agencies.
As a business, you won’t have the same rights regarding debt collection that protect individuals under the federal Fair Debt Collection Practices Act. Still, you do have some rights to fair and professional debt-collection practices.
Each state has its debt collection laws for businesses. To get a better understanding, research those for the state where your business is located. You should also review the Uniform Commercial Code (UCC), which is a set of laws governing commercial transactions that are applied uniformly across the US.
Additionally, review the "best practices" for debt collection provided by the Commercial Collection Organizations of America (CCAA), an entity governing collection agencies in the business-to-business space.
After understanding the consequences and rights related to debt collection by agencies, it may make sense to pay them. However, before you give in, there are some compelling reasons against paying collection agencies. Let’s explore them next.
Here are some valid reasons explaining why you should never pay a collection agency. Keeping these in mind helps you make an informed decision regarding your debt payment.
Paying the collection agency to settle your outstanding debt will not raise your business credit score. Instead, it may actually drop momentarily. That’s because it re-ages the account, making it appear more recent. In the short run, this may cause more harm than good.
Moreover, the negative status of "paid collection" will continue to lower your score for years after it has been paid.
A collection agency has a set amount of time to file a lawsuit against your business to collect the money owed. This time varies from state to state and is known as the Statute of Limitations.
The collector can no longer sue you for the debt after the statute has passed. However, if you make a payment or even merely promise to pay, you essentially reset that clock for a maximum of three more years.
Therefore, if the statute is about to expire, do not give them extra time by paying.
Collection agencies often purchase defaulted debts from original creditors at significantly discounted rates. This implies that they can bargain and agree to accept a lot less than what your business initially owed.
Example: Consider a situation where you had taken a business loan of USD 30,000 from the original creditor. Since you were not able to repay the debt to the creditor, they might have sold the debt to a collection agency for, say, USD 5,000. Hence, the agency has great room for negotiation.
Pro Tip: Although they will first ask for the entire sum in the hopes that you will pay without inquiry, negotiate hard to get a better deal, say somewhere around USD 10,000.
Now that you’ve got the answer to “Should I pay a collection agency,” let’s explore some better alternatives.
Here are some alternative options to explore to deal with debt you owe to a collection agency:
Also Read: Best Debt Consolidation Companies
As soon as you file for bankruptcy, the automatic stay kicks in and shields you from any debt collection attempts, including litigation.
Your qualified debts may be erased in as short as three to four months if you file for Chapter 7. However, filing for Chapter 11 will allow your business to continue to operate under a reorganization plan.
When your business fails to make debt payments, creditors will likely take action to recover some or all of the money. You can take the following steps to streamline the process of debt collection:
Remain composed and professional when debt collectors contact you. Even though collecting debt is their responsibility, some may do so in an intimidating or unprofessional manner, which you should not allow.
Rather, pay attention to what they have to say and gather data. Note down their name, the name of the collection agency they work for, the name of the lender, customer, or vendor they represent, and the total amount owed.
Subsequently, inform them that you will look into the matter and schedule a time and date for a follow-up. In this manner, you will have time to conduct research and, if required, seek advice from your attorney and/or accountant.
After you have gathered information about the debt, do your research to make sure it is legitimate. Occasionally, the amount may be incorrect, or you may have already settled the debt or arranged a payment plan with the creditor, but the debt collector has not yet received the information.
Additionally, you might receive a call from a debt collection agency regarding a debt that has already been discharged or is not legally collectable (also known as zombie debt), in which case you should not be required to make payments. In other cases, you may receive a call regarding a debt that you were unaware of due to identity theft.
If the debt is legitimate, the debt collection agency and you must agree on a payment schedule that works best for you. This schedule may include a complete payment at once or multiple payments over time.
You have some negotiating power in such a scenario because payments of any kind are advantageous to both the debt collector and the creditor.
Make sure you obtain a written plan that will shield you and your business from any predatory actions taken by the debt collector later on.
Prioritize and make the payments on time. Leverage bookkeeping software's automated payment features to avoid worrying about delayed payments.
Deciding whether to pay a collection agency involves understanding the debt’s legitimacy, your business’s financial situation, and the legal implications. Whether you choose to pay, negotiate, or explore alternatives, make sure you are fully informed before making any decisions.
However, if you feel overwhelmed with the entire process, do not worry. South East Client Services (SECS) is here to help your business navigate the complexities of debt collection. Our experts can provide a customized approach to review and respond to a debt collection agency while avoiding legal complications and keeping your business’ working capital structure intact as much as possible.
Are you ready to evaluate and simplify your debt payment process? For professional advice on navigating the intricacies of debt collection agencies and ensuring a sustainable and balanced capital structure, contact SECS today.
