Collections

Resources for Improving Collections Operations

  • What is Collections?

    The purpose of Collections is to ensure that delinquent accounts are reconciled and paid in a timely, cost-effective manner. Companies must balance direct credit losses and the costs of debt recovery judiciously. Most companies are willing to allow small debts to lapse if the cost of recovery starts to exceed the amount being collected. Companies can afford to devote considerable time and energy, however, to the collection of larger debts. Typically, collections agencies follow an escalation method based on the number of days the account has been delinquent and the amount owed.

    Companies conducting first-party collection activities (i.e., collections handled by the original creditor) have more incentive to preserve and extend relationships with the existing customers, even if their account is delinquent. Acquiring a new customer is considerably more expensive than retaining an existing one; their primary interest, therefore, is to preserve goodwill with the debtor. At a certain point however, typically when the debt is 90 or more days past due, companies will enlist the help of a third party collection agency to collect past due account balances.
  • The History of Collections

    Collections have been performed since the creation of currency (and even before – crops and other goods could be loaned or borrowed based on verbal credit agreements). Ancient Babylonian law dictated that a debtor could repay his balance to a creditor in crops or other goods if he did not have the currency required for repayment. The Babylonians also forbade creditors from seizing a debtor’s grain or oxen without proper authorization; if the creditor did so unlawfully, the claim would be completely forfeited. In medieval England officials called “catchpoles” were responsible for collecting debts on behalf of bailiffs (bailiffs were local officials who served under county sheriffs). During the Great Depression of the 1930s, foreclosure was the most common method of debt collection, since very few individuals had the available funds to repay their debts.

    Until the 19th century debtors’ prisons were commonly used to punish individuals who were unable to pay their debts. Although this may sound like an antiquated, barbaric way of dealing with unpaid debts, these prisons are still used in Hong Kong, the United Arab Emirates and Greece (among other locations).
  • Modern Trends in Collections

    All collection agencies are subject to the regulations set forth by the Fair Debt Collections Act of 1977. This bill deals with issues such as debtor harassment, threats and acceptable hours of contact (8am-9pm). The act also requires that collectors identify themselves explicitly and notify the consumer of their right to dispute the debt if they so choose. The Fair Debt Collections Act does not apply to first-party collections groups (direct creditors). In 2010, the Bureau of Consumer Financial Protection (CFPB) was created to further monitor the activities of collection agencies. The CFPB is a part of the U.S. Federal Reserve. In some cases, collections activities are also governed by state laws (in addition to federal laws), further complicating collections compliance.

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