On page two of the FTC Report, it begins to describe the “Debt Collection Process”. First, often times creditors use “in house” or their own collection department to attempt to collect the debt. When this is unsuccessful, the creditor will charge off the account and send it to a third party collector. This can be a collection agency or a collection law firm.
Another option is to sell the debt to a debt buyer. The report contains this interesting and short summary of what debt buyers do with debts they buy:
(1) retains the entire porfolio and collects on it;
(2) retains and collects on part of the portfolio and reselss the remaining accounts: or (3) resells the entire portfolio.
Debt buyers that keep accounts will either collect them in house (for example Midland Funding often does this) or will assign them out to collectors (LVNV does this).
Here are some interesting facts about the collection process from the report:
1. “Debt buyers usually pay five percent or less of the amount owed on delinquent accounts they purchase.”
2. “If the contingency agency [collection agency] is successful in collecting on the debts, it will be paid a portion of the amount collected, with the average contingent fee rate in 2005 reported to be 28%.”
3. “Collection law firms generally are paid either on an hourly basis or on a contingent fee basis.”
4. “Rather than being paid contingency fees or hourly fees, some collection law firms also purchase debts and derive revenue from collections through judicial [lawsuits] or non-judicial [collection or arbitration] processes.”
In our first post in this series, we looked at the purpose of the report and in our second post we looked at the overall summary of what the FTC proposed and what it found as areas in the law that needed to be changed. In our next post we will discuss the “Legal Framework” of debt collection – that is the laws that apply, particularly the federal laws that govern debt collectors.
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