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A collection agency is a business that pursues payments on debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. more...

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Other agencies, sometimes known as "debt buyers", purchase debts from creditors for a fraction of the face amount of the debt and pursue the debtor for the full balance.

Creditors typically send debts to a collection agency in order to remove them from their accounts receivable records; the account is then written off as a loss.

Debt collection agencies have a reputation for engaging in threatening behavior, harassment or coercion. However, collection agencies are governed by laws under state and Federal laws that prohibit certain abusive practices. Failure to adhere to such laws may result in lawsuits or government regulatory actions that can result in large fines, damages that must be paid to the offended party, or even closure of the agency (see, e.g., CAMCO).

Scope of article

The information in this article applies primarily to collection agencies in the United States of America, which make up the majority of all collection agencies worldwide. However, much of this information is relevant outside the United States as well.

First Party Agencies

Some "agencies" are departments or subsidiaries of the company who owns the original debt. These are usually the least likely to settle for less than the total balance. Because they are a part of the original creditor they are not subject to many of the laws which govern collection agencies. These agencies are called "First party" because they are part of the first party of the contract, the merchant. The second party is the consumer, also called the debtor in collections terminology.

Third Party Agencies

The term collection agency is usually applied to these agencies. They are called "third party agencies" because they were not a party to the original contract. In the United States, consumer third party agencies are subject to a federal law called the Fair Debt Collection Practices Act or FDCPA. This federal law (passed in 1977) is administered by the Federal Trade Commission or FTC.

Assignment of Debts

Owed bills or debts are referred to as accounts by bill collectors. Today, more and more accounts are being purchased by debt buyers than in the past. Traditionally, it has been common business practice to assign accounts directly to an agency, which costs nothing for the merchant or the collection agency, excluding the cost of communications by mail and telephone. In this way, the collection agency is acting as a legal agent for the merchant. The collection agency makes money only if money is collected from the debtor. The agency will then take a percentage of the amount owed (usually 15% to 50%, depending on the type of debt) and the remainder is turned over to the client (the original merchant).

Read more at Wikipedia.org