September 25, 2022

Digi Squad

Tech & Business

Debt Collection: Buying Debts vs. Collecting on Contingency

3 min read

Man Reading Debt Collection Notice Letter At Desk

Debt collection agencies provide a valuable service to business owners unable to successfully collect debts on their own. There are different types of collection agencies as well as different collection models. In terms of collection agencies, you have general debt collectors and specialist collectors. And in terms of business models, some collection agencies buy debts outright while others collect on contingency.

Do you know the differences between collection agencies and business models? If so, you know more than most people. If not, you are in good company. This post will lay out the basics for you. Note that all the information in this post is general in nature. Each state has its own rules and regulations governing debt collection.

Different Types of Debt Collectors

The focal point of this post is buying debt as opposed to collecting on contingency. Before we get to that, however, let us briefly discuss the different types of debt collectors. First is the general debt collector. This is a firm that focuses on general, day-to-day debts like utility bills, cell phone bills, and even medical bills. Specialist collection agencies are those that focus in one particular area. Take Salt Lake City’s Judgment Collectors. Court judgments are the only cases they take.

Different Business Models

Collection agencies can either buy debt from their clients or collect on contingency. Debts are considered assets under law, so they can be freely sold, bought, and traded among parties. That is why collection agencies can buy debts from their clients.

As a company owner, you would sell a debt at a discounted rate. Perhaps a debtor owes you $100. You sell that debt to a collection agency for $75. The difference – $25.00 in this case – goes to the agency as payment.

When agencies collect on contingency, they do not purchase debts. Rather, they agree to do the work in exchange for a certain percentage of what they collect. If they collect nothing, they get paid nothing. What they do is a lot like personal injury lawyers who don’t charge if they do not win.

Covering Incurred Expenses

When debt collectors purchase debts outright, they automatically incur all the expenses of collecting them. That is because purchasing outright makes the debt an asset owned by the collection agency. Expecting the client to pay expenses after selling the debt at a discounted rate would be unreasonable.

As for the contingency model, it can go either way. Judgment Collectors covers any and all collection expenses on their own. Clients who turn their cases over to them don’t spend another penny on collection. However, there are some contingency-based collection agencies that still bill clients for some or all of the expenses involved.

No Better Model

Even with different types of collection agencies and business models, there isn’t one way of doing things that’s always better than the other options. You might have one company that decides to sell its debts to a collection agency at a 40% discount. On the one hand, they have to accept a much lower rate. On the other hand, they are guaranteed to get something. Another company that chooses the contingency model has no such guarantee. But if contingency collection is successful, that company stands to get a higher percentage of the total.

Selling debt to a collection agency is pretty straightforward. The client and agency decide on a discounted rate, complete the transaction, and that’s that. The contingency model saves a company upfront costs and eliminates the risk of paying for services that ultimately prove unsuccessful. Likewise, there are pros and cons to the contingency model as well.