How Much Do Debt Collection Agencies Charge?

If someone owes you money and you are having a difficult time collecting, you may want to consider getting professional help from a debt collection agency. Working with a collection agency can be one of the most effective and reliable ways to recover a debt, but it comes at a cost. Before sending an unpaid bill to collections, you should first make sure that hiring a collection agency is the best option for you. Our guide to debt collection options can help you understand the pros and cons of each approach. 

If you are confident that working with a debt collection agency is the right approach for your situation, you will next want to be sure you understand how much collection agencies charge for their services.

How do collection agencies charge?

Debt collection agencies primarily charge for their services by contingency or by flat fee:

Contingency

Contingency debt collection refers to an agreement in which a creditor pays a percentage of the debt to a collection agency upon successful collection. If the agency does not collect, then the creditor does not have to pay a fee. In other words, payment is contingent upon collection.

Agencies that charge by contingency are called contingency collection agencies. These agencies typically charge between 15–50% of the total amount collected. The actual percentage rate depends on how difficult the debt will be to collect and how hard the agency will work to collect it. Debts that have a higher likelihood of collection tend to have a lower rate because the agency has a higher chance of successfully collecting and therefore getting paid. Agencies consider several factors when assessing debts, including the size, or the amount owed, and the age, or how long the debt has gone unpaid.

The chart below shows typical contingency collection rates for debts of different sizes and ages. Keep in mind that these are only two of many factors and that these rates are not guaranteed.

Flat fee

Flat fee debt collection agencies charge a fixed rate for every account, regardless of the size of the debt or other factors. However, fees are charged in advance and are not contingent upon collection, meaning that the debtor pays even if the agency does not collect. These fees are typically low, around $15 per account. While the low rate may be appealing to a debtor, it also represents a very different approach from contingency collections. This flat fee collections strategy is more likely to be used by large agencies that take a high volume of cases and make less effort to collect. Because the fee is paid upfront, the agency has less incentive to collect.

In most cases, contingency will be the most effective method for recovering debt. Because you only pay if the agency collects, there is no risk of losing money. You may pay more for successful contingency collection than you would for flat fee collection, but your collection agent is far more incentivized to dedicate time and effort to your case.

When it comes to debt collections, you get what you pay for

When considering the cost of debt collection, it is important to set your expectations accordingly. Understand that there is a spectrum of both the cost and the quality of services you should expect to receive. If you want the cheapest possible rate, you should expect to get the least effort from the agency. On the other hand, if you want a high-quality agency that will work hard to collect, you should expect to pay more. In short, you get what you pay for.

To get a realistic idea of what it will cost to send a bill to collections, take a moment to consider your debt situation and how much you’re willing to pay to recover your debt. Think about where you might fall on the spectrum of cost and quality:

On the lowest end of the spectrum, you can expect rates closer to 15% of the debt. You should expect the agency to send demand letters to the debtor and wait for a phone call. At this level, you may not have a dedicated agent for your case, and it may take more effort on your part to communicate and get updates on the process. 

However, there are situations in which this level of service is adequate. For example, if you have a relatively straightforward case and just need the leverage of a debt collector to help recover the debt. Consider your debt situation. Do you have accurate, up-to-date information on the debtor? Do you have clear documentation of the debt, such as a contract or invoices? Is it a debt owed between businesses? All of these are indicators of a debt that might be solved by a simple demand letter from a collection agency.

At the highest end of the spectrum, your rate may be closer to 50% of the debt. For this price, you should expect more significant effort from the collection agency, including tactics such as credit reporting and skip tracing, which is the process of locating missing information about a debtor. At this level, the agency will not only send demand letters but also send email and text messages and leverage social media and other resources.

The challenge with finding a good collection agency is that there is no guarantee paying more will yield better service. Before doing business with any agency, make sure you read reviews from customers and resources like the Better Business Bureau. Practice due diligence and find out as much as you can about an agency and its process in advance.

What is the success rate for collection agencies?

The ultimate measure of whether a collection agency works for you is whether or not they collect. However, it is important to understand the success rate of debt collection. There is no 100% guaranteed solution. Even the best agencies are not able to successfully collect every debt, nor can they collect 100% of the principal amount even when they are successful. This is simply the nature of debt collection and doing business overall. Think of debt collection as a tool to help bolster your bottom line rather than a guarantee against risk.

One thing you can control is the terms of the agreement with your collection agency. In particular, you have the right to authorize the agency to settle for less than 100% of the debt. For example, if you want to collect an unpaid bill for $1,000, you could tell the agency to collect whatever they can, even if the debtor only agrees to pay $500. On the other hand, if you are not willing to settle for less than the full amount, you can communicate that to the agency. Make sure you communicate your expectations about the process before sending a bill to collections.

Who pays collection agency fees?

When a creditor sends a bill to collections, the creditor enters into an agreement with the collection agency. The agency takes action to collect from the debtor. If they are successful, the agency will pay the debt back to the creditor, minus the agreed-upon collection fees. In short, the creditor typically pays the fees out of the principal debt.

However, proactive creditors may choose to include a clause in their agreements that states that the debtor is responsible for paying fees if the bill is sent to collections. This may include collection fees, attorney fees, or any other costs associated with payment disputes. 

For example, a vendor providing a service to another business may stipulate that if the business does not pay its bills, the vendor can add the cost of debt collection to the principal debt. For example, imagine that a business owes a vendor $1,000 in unpaid bills. The vendor hires a collection agency to recover the debt at a 30% contingency fee. If the agency successfully collects, the business would have to pay $1,300—$1,000 in principle and $300 in fees, or penalties.

Note that this clause must be included in the original contract between the creditor and the debtor. A creditor can not simply decide to hold the debtor responsible for collection fees if the debtor did not agree to it ahead of time.

When deciding whether or not to include such a clause in your contracts, start by considering risk: 

What is your risk tolerance?

There is risk involved in doing business. Mitigating risk comes with trade-offs. If you are not willing to take the risk of an account going to collections, you will have to be more selective about who you do business with. Potential customers, clients, and partners may feel threatened by a clause that holds them accountable for collection fees. Ask yourself whether you are more concerned about turning away business or about having to pay collection fees.

How much do you trust the debtor?

You may want to have separate agreements—one that includes the clause and one that does not. When dealing with customers or clients that you trust, whether you have a long history of doing business or they have a strong reputation, you may not need the clause as a hedge against risk. When working with riskier debtors, you can include the clause.

Ultimately it comes down to risk tolerance and trust. Think carefully about who you are doing business with and how you want to manage your relationships.

How much can collection agencies legally charge?

There is no limit to what collection agencies can charge the creditor, but competitive contingency rates range between 15–50% depending on the agency and specific debt situation.

However, there is a limit to how much the creditor can assess the debtor in interest and penalties above the principal amount of the debt. For example, a creditor would typically not be able to charge a debtor $1,000 in fees for a $100 debt. This is relevant in the case that the creditor included a clause in the contract stipulating that the debtor is responsible for fees, as discussed above. The interest rate on late or missing payments is often included in the contract. If it is not, each state has its own limit on the percentage of interest that can be charged.

What happens when a debt collection agency collects?

When a collection agency successfully recovers your debt, you should expect a clearance process that may take some time. Repayment is not immediate—if the agency gets paid today, you will not get repaid tomorrow. When the agency sends payment, they will also send a statement of their work.

If the collection agency does not successfully collect, or if you’re not happy with them, you can always go to another collection agency. This is called a second-placement debt, and this is not very attractive to collection agencies because they are more difficult to collect. Some agencies won’t even take second placements. Because of this, you should hire the best collection agency you can find on your first attempt to have the best chance of collection.

Conclusion

You should now have a strong understanding of how collection agencies charge which you can use to set your expectations for what it will cost to send a bill to collections. Cost is just one of many factors when it comes to finding a great debt collection agency. You also want to find an agency that will work with you and has the right tools for your specific debt situation.

If someone owes you money, get a free collection quote with Empire Credit and Collection today! You will not pay us a dime until we get you paid, guaranteed.

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