The definition of a collection account is an account with late payments that have been forwarded to a bill collection company, generally when the debt has fallen ninety to one hundred and twenty days late. Creditors will either attempt to collect their debts themselves, or more often send unpaid accounts to third party collection agencies to remove them from their accounts receivables. Then they will write off the debt in full that is owed as a loss.

From doing this, the creditors reap two benefits: first, they can write the debt off as a loss on their taxes, and second, the cash that does get collected is then recorded as a profit. Time is the enemy in the collections industry, and when an account gets to old enough, it might be sold from the original creditor to a third party collection agency for a fraction of the original amount.

The third party agency becomes the creditor after this, the original creditor benefits from the purchase, and any money that the third party collection agency collects after the original purchase goes straight to them.

After receiving mail correspondence from a debt collection agency, it is always a good idea to verify that the company that is contacting you has the legal right to collect the debt on your delinquent account. By law you have five days after the agency contacts you to request verification of the debt, and you must do this in writing. Get the fax number of the debt collection agency for this purpose.

Keep in mind that a debt collection company might hold on to a collection account for only a few months, and if they cannot collect the debt that is owed, the account may be forwarded to another debt collection agency. This process continues until the account is paid, or the statute of limitations (typically seven years but depends by state) on the debt runs out.

Rapid Recovery Solution is a commercial collection agency that composes stories about commercial debt collections. Free reprint avaialable from: What Is A Collections Account? Debt Collection Basics Part One.

In the first article of this series I explained what a collections account was. It is a delinquent account that generally runs 90 to 120 days late. Collections accounts will either be collected by the original creditor itself, or sent out to collection agencies. Sending an account out to a collection agency benefits the creditor because they can both write the debt off on their taxes and collect profit on the money owed.

Sometimes old debt will be sold to a third party collection agency who becomes the new creditor. This old debt will be collected or sold to another agency until it is paid or the statute of limitations (usually seven years but it differs by state) runs out. At this point, a third party debt collection company doesn’t have the authority to negatively mark your credit score or take legal action against you, but they are legally able to send letters to you and persist with the collection phone calls.

Collection agencies will obtain the following data to coordinate a game plan to collect the debt that they are trying to get: the name and address of the debtor and a record of all correspondence with them, the amount that is owed by the consumer and the date of the last payment. A collection agency has the authority to pull a credit report on a debtor and communicates with the credit bureaus often to keep information current.

All third party collection companies are regulated by Federal (the Fair Debt Collection Practices Act and Fair Credit Reporting Act) and state laws that are typically very strict. They report to the Federal Trade Commission, which tracks statistics and complaints about third party collection agencies.

It is only a very rare case in which the Federal Trade Commission will get involved in a single complaint about a debt collection agency, but if the agency notices a trend that many people are complaining about the same agency it will look into it.

Rapid Recovery Solution is a commercial debt collections agency that writes about commercial collection agencies. This article, Debt Collector Basics: Who They Have To Answer To Part Two has free reprint rights.

Debt collectors can be categorized into third party and in house collectors. In house collectors work directly for creditors. Many times, creditors will use a company name, address and phone number that is different from their own to fabricate the impression of an “outside” agency. This is due to the theory that debtors will take communications from a separate company more seriously. In reality, in house collectors work for the internal collection departments of large, typically financially based creditors such as credit card companies, mortgage companies, and health care providers.

However, most debt collection is performed and completed by third party collection agents, who work for an agency that is separate from the original creditors. Third party debt collection agencies are “hired out” and work on behalf of various lenders, businesses, and commercial companies. Third party debt collection agencies also purchase old debts as their own from original creditors.

Because they make up the overwhelming majority of collectors, this series of articles will focus mainly on third party collection companies and their collection agencies. Third party collection companies are either hired, or work on a contingency basis, where they receive a percentage of the money that they collect. Individual collectors are generally paid with a lower base salary plus commission.

As was mentioned before, some third party collection agencies also buy large amounts of written off “bad debts” for a small percentage of the face value. For example, if a debtor owes five hundred dollars, an agency may pay only 1% – 5% of this total. After a debt is sold, the debtor now owes the entire amount to the agency that purchased it.

The reason the agency is able to purchase the debt for so little is because written off debt will be very dated, and the chances of recovery substantially decrease with time. Any cash that the third party collection agency makes off of the purchase price is their profit.

Mallory Megan works for Rapid Recovery Solution and writes articles on medical collection agencies Also published at Introduction To Debt Collectors: Part One.