Debt Collector

A debt collector is an agency that businesses and lending institutions hire to recover debts that individuals or entities fail to pay back. Companies extend credit to customers, and lenders offer loans to borrowers with a promise of getting it repaid within a specific tenure. However, when they fail to do so, the agency is hired to recover the outstanding dues.

The debt collectors work for a fee or commission paid as a percentage of the total amount recovered from debtors. These collectors are also referred to as debt collection agencies. As the collection process might be disturbing for some debtors, there are debt collection laws to protect their dignity.

• A debt collector is a person or agency engaged by a company to recover its debt due to selling goods and services that have exceeded the accepted payment terms.
• Before proceeding with the debt collection, a collector shall ensure the genuineness of the debt and carry out an independent analysis.
• Debt collectors are classified into three categories based on the collection practices involved – first-party, third-party, and debt selling individuals or agencies.
• In the United States, the debt collection entities must comply with the Fair Debt Collection Practices Act (FDCPA), which protects debtors against illegal and unethical debt collection conduct.

A debt collector is contacted by companies debtors owe to. Businesses do not have time to call or chase every debtor and ask for repayment. This is where the debt collection agencies become active. The companies that extend credit to customers but do not receive the repayment on time have to take collectors' assistance in recovering the outstanding dues.

For borrowers unable to pay off their debts, their report is sent to the credit bureau. As a result, this delinquency hits the borrowers' credit history and credit score, making them less trustworthy. In addition, the businesses hire debt collectors within three to six months of default to ensure they recover the outstanding dues at any cost. 

The debt collector can be hired to collect credit card dues, phone or utility bills, loan payments, etc. Though credit is offered to recipients with an intent to get it back within the scheduled date and time, its conversion into a bad debt leads companies and borrowers to an awkward position. Therefore, the collection agencies help them retrieve the amount on their behalf.

For companies and borrowers, having a collector on board is a wiser option as they cannot devote much time to finding out the debtors and recovering debts. In addition, the collection agencies work for a fee or commission, which is a portion of the fund they collect from defaulters.

The debt collector companies or agencies that businesses or lending institutions come across can be classified into three categories based on the practices they follow – first-party, third-party, and debt selling.

The first-party or internal collectors are people who belong to the same organization to which borrowers or customers owe the irrecoverable amount. The company's internal team handles the recovery of the outstanding dues. On the other hand, a third-party collector is an external agency that companies hire to recover the amounts from debtors. They work for commissions or fees based on the amount recovered from defaulters. While the former remains a bit lenient to their customers to ensure their organization's reputation is not hampered, the latter is less friendly to the debtors.

The next is a debt selling practice for indirect collection. In this case, when the companies or businesses fail to recover the amount, they decide to write off such debtor and sell the debt to a third-party entity. As a result, the debtor no longer continues to reflect in their accounts. In addition, the responsibility for collecting the debt goes to the companies that buy those debts and become debt buyers. However, the collection approach might not be as lenient as for the rest two as the new company has nothing to do with or is not accountable to those customers.

Let us consider the following example to understand the debt collector jobs and responsibilities well:

XYZ Bank hires Stephens as a debt collector, given his academic background in finance and also the way of approach he prefers. The former gives him a list of defaulters who owe a significant amount of money. He starts with recording the delegated accounts and notes the overdue and outstanding amounts. Then, he develops a plan on how to begin the recovery process. 

Stephens connects with the debtors and mutually decides on the deadline for repayment. Meanwhile, he also handles all kinds of queries of the debtors. As a result, a few debtors paid as per his plan, but a few still missed. However, being an educated collector, he did not respond harshly or unethically to the situation. Instead, he hired a debt collector lawyer to continue the further legal action for defaulters.

While some debtors intentionally skip repayment and run away to remain non-traceable to lending authorities or businesses, some genuinely suffer from the financial crisis, which delays their repayment. Thus, the collectors should act in a strictly professional manner while recovering the debts and not adopt any harmful means to achieve the same.

Different countries have different laws and regulations to protect the dignity of the debtors. For example, in the United States, the Fair Debt Collection Practices Act (FDCPA) limits the collectors' actions while recovering the outstanding dues. Thus, they must comply with the same when contacting the debtors and acting professionally.

Similarly, in Australia, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) put forth the Commonwealth laws to keep debtors protected against any illegal and unethical debt collection conduct.

This article is a guide to what is Debt Collector and its meaning. Here, we explain its types, laws, responsibilities along with proven examples. You can learn more about finance from the following articles: -

• Debt Consolidation Calculator
• Debtor Definition
• Sovereign Debt Types
• Defalcation