Insights From the Vault of a Debt Collector

The history of debt collection is as old as the history of money. Under Babylonian Law, strict guidelines governed the repayment of debts, including several basic debtor protections. In medieval England, a catchpole, formerly a freelance tax collector, was a legal official working for the bailiff responsible for collecting debts, using coercive methods. If a debt could not be repaid, the debtor and his wife, children or servants were forced into debt slavery, until the creditor recovered losses by way of their labour. By the Middle Ages, laws were passed specifically for handling debtors. If creditors were unable to collect, the court was now being used a means of recovery. Bailiffs would either visit the house of debtor and collect goods in lieu of the debt, or the debtor remitted to debtor's prison until his family could pay; some creditors forgave the debt.

DEVELOPMENT OF DEBT COLLECTION AGENCIES

Once debtors' prisons were done away with, creditors had no solid recourse against delinquent debtors. Once collateral was involved, such as a mortgage, the creditor could take the property in order to indemnify themselves. However, for unsecured debts, the creditor had no means of recovering his investment, as the debtor had no money. If he received judgement against the debtor in court, everything hinges on his ability to pay. The only thing a creditor could do, was to extend credit to those who seemed capable of paying it back. The savings and loan crisis of the 1980's, saw a huge resurgence of foreclosures and written-off accounts, but this was on a much smaller scale compared to the Great Depression. Some financial innovators saw it profitable in buying up these delinquent accounts and attempting to collect a small portion of the amount due. They purchased these accounts from the original lenders at an agreed rate and turned profit, by collecting a fraction of what was owed by the debtor.

FIRST-PARTY AND THIRD-PARTY AGENCIES

First-party agencies are first-party to the contract (i.e. the creditor) and are usually a subsidiary or a department. Because they are not a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies. They get involved earlier in the debt collection process and have a greater concern of maintaining client relationship. These agencies try to collect the debt in the shortest possible time but where all else fails, they are passed to a thrid-party agency, sold or written-off. A debt collection agency is a third-party agency and are not associated with the original contract. Debts are assigned to these agencies on a contingency-fee basis, which initially costs nothing to the creditor. Another method used is commission based where the collection agency only makes money when they collect; No Collection-No Commission. Fees range from 10% - 50% depending on the type of debt, the age of the account and how many attempts have been made to collect. Other services provided by agencies are flat fee "pre-collection" or soft collection services, which usually takes the form of letters. Ultimately, if you owe a debt, it's because you made the choice to borrow money. Your lender made that loan or offered the credit line, contingent upon your promise to pay it back. A debt collector is simply trying to collect what is legally and ethically owed by you.