When an individual or business refuses to or is unable to repay a debt, the creditor may lack the will or the resources to pursue collection. In many cases, the creditor instead hires a collection agency to collect the debt. Some agencies buy debts outright, but they usually receive a commission based on the amount of debt they collect, sometimes in addition to a flat fee.
Generally, a collection agency is paid based on the amount of debt it is able to collect. Usually, payment is calculated as a percentage of total collected debt. For example, a debt collection agency may be paid at a rate of 40 percent. If the agency were able to collect $10,000 worth of debt, it would be paid $4,000. This commission structure provides the agency an incentive to collect as much of the debt as possible.
In addition to the commission, a collection agency may also receive a flat fee. Generally, this fee is relatively small, with the bulk of the payment coming from potential commissions. However, because payments for these commissions are deferred for some time, the agency may demand an upfront fee, too, or an advance on the commissions. Agencies are seldom paid a flat fee up front, as this leaves them with little incentive to collect on the debt.
In lieu of being hired by creditors, some collection agencies purchase the debts directly from the creditors, often for pennies on the dollar. The collection agency then attempts to finance itself by collecting money from the debtors who owe money on these accounts. This form of payment resembles speculative investment on the part of a collection agency, as it must estimate how much money it believes it can collect before purchasing debts.
The compensation structure for individual collection agents employed by an agency also varies. While in some cases, individual agents are paid a commission based on the amount of debt they are able to collect, in other cases the agents are paid like a regular employee, earning either an hourly rate or an annual salary. Often, agents receive a small salary but earn most of their money off commissions.