1. Do the Research
Debt collection agencies often specialize in certain areas. Some, for example, excel in securing funds from large companies while others do well working with small businesses or home-businesses. If at all possible, find out what sort of debtors the collection agency most often deals with and what sort of businesses it serves.
2. Verify the Agency's Legitimacy
Different states and localities have different rules for debt collection agencies. Make sure the one you want to hire is bonded, licensed, and adheres to the rules of the Fair Debt Collection Practices Act.
3. Ask if the Agency Uses "Skip Tracing"
Unfortunately, sometimes debtors skip town. To combat this practice, good collection agencies use what is known as "skip tracing", which means that they use and have access to several databases that allow them to locate a debtor who has left no forwarding address. This is especially important if you've been personally contacting your debtor and have been routinely ignored.
4. Make Sure the Agency has Insurance
No matter how much research you do, there's always the possibility that a debt collection agency uses aggressive tactics or that the debtor feels the agency acted in bad faith. In these instances, the debtor can sue. Whether or not you win the case, you want to make sure that you won't be held liable for hiring the agency. Get proof of insurance from your debt collector in the unlikely event that your debtor takes you both to court. This is most often called "Errors and Omissions Insurance" and is held by good debt collection agencies as protection.
5. Compare Fees and Contingency Costs
Once you've found a few collections agencies that might work for your business, it's time to look into their costs. Here, it's worth noting that the way in which agencies charge for their services can be very different and you should choose the one that's right for you. Some common payment structures are as follows:
- Flat Fee: A straight-forward cost usually associated with "pre-collection" fees and usually fairly small. This flat fee is generally offered early in the debt collection process.
- Contingency: This is the most typical arrangement. Most debt collectors use a "No Collection - No Fee" model and charge somewhere between 25% and 45% of the total amount for collection, depending on the particulars of the account (such as how old it is, how many contacts have been made, etc.).
One thing to keep in mind is no matter what, once you've hired a debt collector, you will not be receiving the full and total amount you're owed. For this reason, it's recommended you exhaust your other options before hiring one, like writing your own Demand for Money Owed first.
That said, dealing with debtors can be frustrating, slow, and mentally taxing. It can drain your resources. When you have no other recourse, it's best to hire a debt collector instead of simply letting your debtor get away with not paying you.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.