Should you consider factoring or selling your debt as opposed to sending to third party collection firms?

Factoring is a financial transaction whereby a business or individual sells its account receivable (a.k.a. invoices) to a third party (e.g. collection agencies) at a discounted price, for it to be exchange into immediate money to finance the business. It is often misused synonymously with invoice discounting.  Factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.  

Some major financial institutions sell their outstanding accounts both pre-charge off and post-charge off rather than have them worked in-house or sent to third part agencies or law firms. One factor is the volume of accounts and another is that they can obtain working capital upfront rather than waiting for funds to be collected over time. The advantage of this move is the invoices will be turned into money that can be use for the benefit of the company. The downside is collection agencies are known for their aggressiveness, so telephone harassment is a possibility. 

FDCPA (Fair Debt Collection Practices Act) only covers third party collections agencies not original creditors. However Federal Trade Commission has issued a Staff Opinion Letter which indicates that, even if a collection agency has purchase a debt, it is still covered under FDCPA as a third party debt collector. Hostile collections can stress out the customer and might think negatively about the company in which he/she original has debt. This might be harmful for future business opportunities.  

Aside to collections agencies, there are other debt buyers in the market. There are law firms, third party collection agencies and even individual entrepreneurs. There are a lot of individuals or companies that buy debts from individuals to large companies.

How the TCPA can affect you in the collection of your accounts?

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The federal law Telephone Consumer Protection Act of 1991 (TCPA) affect the collection of accounts. It restricts the use of automatic dialing systems, artificial or prerecorded voice messages and SMS received by cell phones to send unsolicited advertisements.

According to the TCPA, you may not call residences before 8 a.m. or after 9 p.m. local time. This limits the collection time for the collection agencies and law firms since this is also the working time for most people.

2nd solicitors even collection agencies must maintain a “Do Not Call” (DNC) list and must be honored for 5 years. The major limitation of this law, as enacted was that it was ineffective at proactively stopping unsolicited calls in that the consumer had to request of each telemarketer to be put onto that telemarketer's do-not-call list. This burden was lifted by the Do-Not-Call Implementation Act's establishment of the National Do Not Call Registry and adoption of the National Do-Not-Call list by the Federal Communications Commission (FCC) in 2003.

3rd solicitors, collectors, telemarketers must provide their name, the name of the person or entity on whose behalf the call is being made, and a telephone number or address at which that person or entity may be contacted. This rule is an advantage for the collections agencies for a callback on the customers.

4th calls cannot be made to residences with artificial voices or recordings. Both the FCC and the Federal Trade Commission (FTC) prohibits artificial voices or recordings by telemarketers, collection agencies and solicitors to land lines and cell phones, even when the caller has an established business relationship with the customer, unless that customer specifically agrees in writing to receive such calls. Certain exemptions would remain, including those for tax-exempt charities, health care organizations, political campaigns, etc.

5th facsimile (fax) transmissions that are unsolicited are also prohibited. If a violation of the TCPA has been made, customers are entitled to collect damages directly from a collection agencies or law firms for $500 to $1,500 for each violation, or recover actual monetary loss, whichever is higher.

How past due should be your customer before you decide to turn over to a third party collection agency and law firm?

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The first tier of collection is with first party agencies that are subsidiaries of the company itself, these are from 1 – 30 days past due. Second tier is 31- 60 days past due, this tier, it depends upon the company if they still want the first-party to continue collecting or if they will pass it on to the third-party collections agency. 

Banks, firms or credit card companies resort to third party collections once the account reaches 90 days to 180 days delinquent. Each country and state has their own rules and regulations regarding collection agencies and their practices which are quite often very aggressive.

 

Third party collection agencies, will try to trace the customer and ensure full settlement of outstanding. If the customer is unable to settle the outstanding, the collector will ensure that a settlement plan or a discount strategy – as agreed by the company and the collection agency- is offered to the customers. 

The advantage of first party collection is there is no lag in time between an account becoming delinquent and the beginning of the collections process. Another is you have knowledge of your customers needs and practices, making the client-customer relationship positive even if the later incurred a debt, which helps down the road to keep the customer loyal to the company. Third party collections can sometimes be seen as hostile, however if your clients need your product or service to keep his or her business running smoothly, they will strive to stay on your good side. Sometimes if the customer just hears a familiar voice asking nicely for a payment is enough to keep the problem solved. 

Many times the third party agency or law firm will have settlement authority from the client to settle for far less than the original balance. Now after 180 days and the account’s still in collections it is advisable to have the account transferred to third party agencies or law firms. 

Third party agency or law firm are subjected to Fair Debt Collection Practices Act of 1977 (FDCPA). This law is administered by the Federal Trade Commission (FTC), this federal law limits the hours of collection agency or law firm to call the customers and prohibits communication of the debt to a third party. It also prohibits false or misleading representation and making threats of actions the agency cannot lawfully or does not intend to take.