August 29, 2022

What is the Role of Private Collections Agencies?

What's the role of private debt collectors

Private collection agencies (PCAs) are a big part of the debt collection industry and play an essential role in helping creditors recover their money. Businesses or government organizations can use these agencies to collect past-due payments from their customers.  

These companies aim to track down those who owe money and persuade them to repay as soon as possible. They also help creditors collect on bad debt that might otherwise go uncollected.  

How Do Collection Agencies Operate?  

A collection agency is an independent organization that works with creditors to recover their debts under legal regulations. This means PCAs must follow the standards set by the federal and local governments, like:  

  • The Fair Debt Collection Practices Act (FDCPA)  
  • The Privacy Act   
  • The Federal Claims Collection Standards.   

Therefore, the PCAs can use only fair means of contact and negotiation to convince the debtors to repay.  

Many PCAs have started using the latest technologies like automated messaging and calls to initiate contact with debtors. In the worst case that they cannot contact the debtor, they may use skip tracing techniques to find the current address and phone number to reach out to them.   

But here’s the thing: collection agencies are helpful for both creditors and debtors alike.  

For creditors, the process of getting their money back is made much easier by having a professional agency work on their behalf. Collection agencies have experience dealing with delinquent accounts, which means they know exactly what to do to get the debtor’s attention and make them pay up. They’ll send messages to remind the debtor to pay off their debt — but most importantly, they’ll offer various options for settling it.   

This could mean paying off part of their debt now and paying off the rest over time or even working out an installment plan.  

For those struggling to make ends meet due to unexpected financial burdens, this arrangement can help them pay back the money in a suitable way. This is also a benefit for creditors as they recover their unpaid accounts.   

Usually, PCAs offer different modes of payment:  

  • Partial Payment: PCAs negotiate with the debtors on a partial payment plan where the owed money is split into smaller amounts, due every month with interest, over a period of time.  
  • Full payment: When the debtors have broken all agreements, PCAs request them to repay the total amount.  
  • Administrative Wage Garnishment: In this plan, the debtor’s employer will retain a percentage of the salary, which will be used to pay off the debt.  

PCAs have been playing a predominant role in the loan and debt industry, with everyone from the government organizations like the IRS to the private financial and insurance institutions making use of their services.  

Role of PCA in Government Organizations  

The IRS has used PCAs since 1996, which was formalized in 2015. IRS is required to use PCAs to collect delinquent accounts where there has been no contact with the debtors for over a year, according to the Fixing America’s Surface Transportation Act. There have also been instances where PCAs handled shelved accounts or accounts unassigned to an employee.   

Due to the lack of resources to collect the delinquent account workload, the IRS has contracted with several PCAs to collect unpaid taxes. The private agencies receive 25% of the total amount collected as a fee for their services.  

According to the recent research published in February 2022, the PCAs have collected over $89 billion through full payment or installation payment through 38,000 accounts as of 2018. During the fiscal years 2017-2020, IRS assigned around $32 billion in unpaid tax accounts to the PCAs, of which $580 million were collected.  

Role of PCA in Private Institutions  

Collection agencies help businesses from various sectors recover their debt — whether it’s a missed loan payment, insurance payment, or due invoices. PCAs offer several collection methods, from anticipating delinquencies to dealing with bad debts.   

Pre-Collections  

Pre-collection services are carried out before the due date because of a delay in payment. This often reminds customers about the approaching deadlines and motivates them to pay up.   

The goal is to get the debtor to devise a repayment plan before proceeding with formal collections.  

IVR & Automated Messaging   

IVR (Interactive Voice Response) and automated messaging systems allow creditors to communicate with debtors and remind them to pay bills via text message or calls.  

IVR and auto messaging channels like chatbots allow debtors to interact and access account information and links to fully or partially pay the debt — without human intervention.  

At Capital Recovery, we use IVR and automated messaging during the initial stages to reach out to the debtors, inform them about the debts and educate them about the various ways to pay them off. Then, our agents negotiate directly to settle debts amicably.  

Online Payment Processing  

Online payment processing is one of the most common functions of collection agencies, but it’s also one of the most important. Online payment processing works the best with automated messaging systems.   

This service allows customers to pay bills online without ever having to contact the creditors or PCA directly. It saves time and money because it eliminates the need for staff to interact with the debtors but still get the debts paid.  

Bad Debt Collections  

If you have a large enough number of bad debts, it could put your business at risk. However, with the help of collection agencies, you can ensure that your debtors pay their bills and get back on track with their payments. PCAs will work with the debtor to either pay off the debt or renegotiate the payment terms.   

Managing delinquent accounts can be difficult for your business, especially when you must devote many human resources to the task. If you find yourself in such a situation, reach out to our team at Capital Recovery. We can analyze your accounts and develop a strategy to increase your debt recovery rate.