Debt collection is a part of business that many new business owners simply don’t think about. Yet, at some point, you’ll need to know how debt collection works. Here’s what you need to know.
Can’t You Just Outsource It?
Can it be just as simple as outsourcing the process to a collections agency? Sure, but it’s important to consider that you may not find the added cost (often taken out of the amount the collector receives on your behalf) something that you’d consider a reasonable expense.
Additionally, you need to choose the right agency. This can take some work. First, you must know whether you want an agency to perform first or third-party collections (you’ll learn more about those concepts in the next section). Second, you’ll need to ensure that the agency is properly licensed and in good standing in whatever state they’ll perform collections. Third, you’ll want to research the company to make sure that they don’t have a history of lawsuits. Learn more about choosing the right collections agency by reading this post.
Know the Difference Between First and Third-Party Collections
First-party collections mean that either someone from your business calls debtors and introduces themselves as a representative of your business or a collections agency calls the debtor and says that they’re a representative of your business. They may say, for example, “My name is Jane Smith. I’m with ABC Company and I’m calling about your past due account.” They don’t necessarily tell the debtor that they’re calling from a collections agency.
The benefit of first-party collections lies in the perceived relationship. It continues to enforce client loyalty. This may not seem important since you’re dealing with a debtor, but it is. It helps protect the reputation of your business if your employee or the collector treats the debtor with kindness throughout the process.
Third-party collections mean that the debtor receives a call from a collections agent who informs them that they are with the collections agency. They may say, “My name is Jane Smith. I’m with ABC Collections. I’m calling because of your delinquent account with ABC Company.”
Create and Use a Debt Collection Timeline
Every business should create and use a debt collection timeline. This timeline explains when follow-up letters and phone calls start, when accounts are moved to a collections agency, and when you’ll consider taking legal action.
You Cannot Collect After a Certain Amount of Time
Every state has a limit, known as a statute of limitations, that covers debt. In fact, you’ll likely find a statute of limitation for contract accounts and revolving accounts. You may find them for secured and unsecured accounts. It’s important for you to classify the type of debt that’s owed to you so that you can follow the right statute of limitations. This statute tells you that you can’t collect on the account after a certain amount of time. If the deadline is three years, you can’t collect on it at three and a half years unless the debt was verified by the debtor or they’re already paying on it. Failure to follow the statute of limitations can lead to a lawsuit against your business.
You Cannot Call Debtors Whenever You Want
The Fair Debt Collections Practices Act outlines when you can call debtors. Generally, that’s after 8:00 am (their time) and you must not call after 9:00 pm (again, their time). Additionally, if the debtor tells you to stop calling them, you must stop calling them.
You Cannot Threaten Debtors with a Lawsuit or with Arrest
Federal law states that you cannot harass, abuse, threaten, or curse at debtors. You cannot use the phone to annoy the debtor, make false statements, threaten them with arrest, or tell them that you’re going to sue them (unless you plan to do it). Make sure that you know and understand the Fair Debt Collection Practices Act.
Get Help with Debt Collection
There’s a lot to know about collecting. If you’re overwhelmed or just want help with the process, schedule your free consultation with Clients ARM. We help clients with both first and third-party collections. We’re licensed in several states. Our collections rate is greater than 90%!