People often confuse debt buyers and collection agencies. The average person does not know the difference between the two and has very little knowledge of the debt collection industry. The three major differences between debt buyers and collection agencies are ownership of the debt, age of the account, and difficulty to collect on the account.
1) Ownership of the Debt
Debt buying is exactly what it sounds like. Debt buyers buy accounts from a creditor for pennies on the dollar. Creditors do this because there is a point at which they need to cut their losses and get whatever money they can. The debt is completely owned by the debt buyer and it is their responsibility to collect on this debt if they want to make a profit.
Debt is owned by the creditor or the debt buyer. When the creditor sells the debt to the debt buyer, the debt buyer may elect to hire a third party collection agency rather than trying to collect the debt themselves. The same goes for a creditor, an agency can be hired as a third-party collector. The creditor and collection agency work out an agreement that gives the collection agency a percentage of the debt collected. Both debt buyers and creditors count on the collection agency to collect the debt.
2) Age of the Account
Age may just be a number to some, but in the collection industry it is very important. Debt that agencies generally collect on is only a few months old and rarely older than six months. Debt bought from a creditor, on the other hand, is “old” relative to other debt. This debt is usually about 3 years old. Chances are in those three years, an attempt to collect that debt has already filtered through up to 3 collection agencies.
It is also important that a company has a good Days Sales Outstanding (DSO). The average DSO for healthcare providers is 60 days. For other businesses, it is under 30 days. Healthcare providers tend to work more with collection agencies than they do with debt buyers. To keep the DSO under 60 days, a healthcare provider needs adequate in-office collectors. To better the chances of keeping DSO under 60 days, a provider can hire a collection agency with veteran collectors.
3) Difficulty Collecting the Account
The older an account, the harder it is collecting. It can be difficult to determine which consumers will pay. There are some accounts that are so old that creditors deem them noncollectable. These types of accounts tend to fall in the hands of a debt buyer.
Some accounts are collectable, but the creditor may not have time or resources to collect the debt. There are ways to value accounts receivable. Once the creditor determines that this account needs some third-party attention, that is when a collection agency will step in.
Statute of Limitations
Debt buyers tend to receive much older accounts compared to collection agencies. Because of the statute of limitations, debt buyers have a much smaller time window before they need to take legal action (the statute of limitations varies from state to state).
As a result, debt buyers are much more aggressive in the collection process. If they cannot collect the debt, then the debt buyer may sue the consumer. Debt buyers sue consumers much more often than collection agencies do. One of the advantages of owning the debt is the debt buyers can take the case to small claims court.
Collection Agencies: Cultivating Customer Service
Debt buyers own the debt, so they are trying to get the consumer to pay for that debt in order to cover their cost of investment and make a profit. Debt buyers may offer a settlement with the consumer of up to 50 percent under the right circumstances. On the flip side, collection agencies do not own the debt. The debt is owned by the creditor who wants to be paid in full because they are paying the collection agency a portion of the money collected. They are trying to work with a consumer to get that debt paid to the creditor in full.
Debt buyers have one goal: get a return on their investment. Anyone who makes a large capital investment is going to want some kind of profit. Debt buyers’ collection efforts are usually more aggressive because the accounts are much more difficult to collect as the account has been worked by the creditor and other agencies before the debt was sold to the debt buyer. Collection agencies are relying on a forward flow of business from the creditor and are focused on helping the creditor maintain a good image in the eyes of the consumer. That’s why it is in their interest to treat the consumer with respect as detailed in The Collector’s Pledge.
For example, let’s imagine a patient who has an overdue medical bill that has made its way to collections. If the person collecting this debt is focused on best practices and on patient financial communications, it is very likely that this will be a happy customer. Happy customers return to the same creditor because they were satisfied with how their debt situation was handled. This keeps a steady flow of business to the creditor which, in turn, maintains a flow of business for the collection agency.
When a debt is bought, the relationship between a debt buyer and creditor is very brief. There is also a relationship between the collection agency and the creditor. When an agency is working for the creditor, the relationship is maintained and also grows. Both businesses mutually benefit from each other.
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