What Does Contingency Basis Mean in a Collections Agency?

Some debt collectors don't charge an initial fee.

Some businesses do not have the manpower or time to devote to debt collections. Rather than hire someone to mail collection letters or telephone clients about past due accounts, some companies choose to solicit help from an outside company.

What Is a Collection Agency?

A collection agency is a company separate from an actual business that handles debt collection efforts. These third-party companies work alongside creditors to recover past due payments. Since many creditors do not have an in-house collections department, collection agencies acquire information on the past due account, such as the debtor's name and address and the amount of the debt. Collection agencies can telephone, send correspondences and even sue debtors if they don't pay a past due balance.

Sending an Account to Collections

Creditors retain past due accounts for a specific length of time. This amount of time varies depending on the creditor. According to Bankrate.com, it's standard for a creditor to solicit help from a collection agency after several months of non-payment -- typically, three to six months. Before handing over the account, creditors attempt to contact debtors. If a creditor's attempts are unsuccessful, then the collection agency assumes the responsibility of recovering funds for the creditor.

What Is a Contingency Basis?

Collection agencies vary in their methods and fees. Some agencies charge companies a flat fee for assisting with debt collection. Other collection agencies are ready to help on a contingency basis. With a contingency agreement, the debt collector or collection agency is only paid by the creditor once the company successfully recovers unpaid funds. This arrangement is beneficial for creditors and companies because it eliminates any initial out-of-pocket expense. If the collector doesn't collect the the past due balance, the creditor doesn't pay for the service.

Considerations

Rather than hire a collection agency to assist with debt collection, some creditors completely sell old debts to a collection agency. This is common after a creditor writes off or charges off an unpaid account. This process involves reporting the loss on the company's financial reports. Once a debt collection agency purchases an old debt, it owns the debt, and any payments or settlement offers must go through the collection agency. In cases where creditors haven't sold the debt but have hired an agency to help with collections, debtors have the option of communicating a pay plan with the original creditor.

References

• Fidelity Information Corporation: Debt Collection Service Information
• NEDAP: Debt Collection