The problem with collection agencies

Written on February 27, 2019 by

There needs to be methods for creditors to collect debt owed them. Otherwise, they run the risk of going out of business.

As a landlord, you are a creditor. If your tenant skips out without paying rent, or if they damage your place more than what the security deposit covers, you need to be able to recover your money.

One way to try to get your money is to use a collection agency. Doing so might work for you, but you should first understand the process and what it entails before you go down this path.

Why?

Because there are problems associated with collection agencies.

1. Collection agencies don’t collect

The odds of a collection agency actually collecting the debt they are going after are not good.

Estimates vary in just how successful collection agencies are. A generous estimate is 20 percent, meaning that there is an 80 percent chance that a collection agency won’t be able to collect delinquent debt for you. And some estimates are as low as an industry-wide 11 percent success rate. That’s pretty dismal.

To make matters worse, the success rate for collections is down from decades past, when the collection rate averaged 30 percent. So not only are your odds of getting your money low when you use a collection agency, the odds are getting worse as time goes on.

2. Collection agencies are expensive

Ideally, as a landlord, you should get all the money your tenant owes you for back rent, damages, and late fees (that were specified in the lease).

The best way of doing that is to handle the collection process yourself, typically by sending a demand letter, calling your tenant, or by starting the eviction process. You might not have the time, however, to track down your tenant, or you might have tried but were unsuccessful.

Related:

Getting some of the money you’re owed is better than getting nothing. So if you can’t collect on your own, you might consider a collection agency. You’ll pay either a flat rate or a percentage of what the agent collects.

You’ll probably pay less by paying a flat rate, but see No. 1 above—the odds are not good that the agency will be successful in collecting the money your tenant owes you. If you pay a flat fee, you potentially are out even more money. If you pay a percentage of the collection, expect to pay between 25 percent and 60 percent of the collected debt to the collection agency.

3. Collection agents can be shady

Some collection agencies allow their agents to use unlawful tactics to try to collect debt. You might have heard stories about aggressive collection agents who harass people for money they don’t owe, threaten jail to debtors, or who call employers and put people’s jobs in jeopardy. None of that is legal.

Not only is it wrong to subject people to unlawful collection tactics (even people who owe you money), it gives you a bad reputation by associating with unscrupulous people. You might even find yourself being sued.

Fair Debt Collection Practices Act

Collection agencies must comply with federal law, specifically the Fair Debt Collection Practices Act (FDCPA). Ask agencies you’re considering using if they comply with FDCPA regulations. Under the Act, agencies must adhere to the following:

  • No calls to debtors before 8 a.m. or after 9 p.m.
  • No calls at work if the debtor requests that.
  • Collector must stop contact if the debtor requests so in writing.
  • No contacting friends and family more than once. And the one contact can only be to get contact information, not to inform friends and family about the debt.
  • Agent must provide proof of the debt to the debtor.
  • Debtors cannot be threatened with harm.
  • Agent cannot threaten to take legal action unless they actually can and will.
  • Collector cannot lie about who they are.
  • Collector cannot send fake legal documents to trick the debtor.

Unless you check out the firm you are hiring and find out the tactics they use to collect, you could be contributing to the problem.

Finding a good agency

Many collection agencies are reputable and play by the rules.

Here are some ways of finding a good agency:

  1. Ask for referrals from trusted professionals you know, such as your lawyer or accountant.
  2. See whether the agency you are considering is a member of ACA International, The Association of Credit and Collection Professionals, the leading trade organization for the industry.
  3. Look online for complaints against an agency you’re considering.
  4. Make sure the agency is licensed.

Bottom line

Using a collection agency could work for you, but be prepared for disappointment. You’ll have a better chance of collecting your money if you hire a collection agency that specializes in collecting rent from tenants. Also, the younger the debt the more likely it will be to collect. Provide the agency with your lease, what the tenant owes, and all attempts you have made to try to recover the money yourself.

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