Deciding between a Debt Collection Agency and a Collection Law Firm

Both debt collection agency and debt collection law firms perform similar roles by pursuing unpaid debts. Additionally, both are regulated by the Fair Debt Collection Practices Act. However, the manner in which the agency or firm collects debt can be different, along with other characteristics of the firm or agency.

It is important to understand the differences, similarities, and limitations of either option before a business turns over its accounts receivable to either one. Some important considerations include:

Some debt collection law firms may require a minimum balance in order to accept work, such as $1,000. In contrast, many debt collection agencies will accept even small debts. Collection agencies may have agents who specialize in collecting such small balances and may pursue debts as low as $25. In contrast, debt collection law firms often have an entire staff of collectors that work to collect the debts. The debt collection law firm may be only one portion of the larger firm.

Debt collection agencies may charge a series of fees, based on the work and response to their efforts. The creditor pays a fee to retain the collection agency. This fee is based on the balance. Fees usually range between 35 percent and 50 percent. A higher fee is charged if the debt collection agency must turn the debt over to a debt collection law firm so that both entities are able to profit off of the account. Additionally, the age of the account and the balance can affect the fee charged.

Debt collection law firms often charge a set fee, often between 25 percent and 33 percent, usually based on the size of the debt. The creditor may be charged fees associated with taking the debtor to court, but these fees are often tacked onto the judgment and then repaid to the creditor. Some debt collection law firms take debts on a contingency fee basis, meaning that the creditor is not charged for their services until the debt is collected on.

The primary way that debt collection agencies and debt collection law firms differ is in regard to the actions that they can take. Debt collection agencies primarily collect debts by making continued contact with a debtor in order for the debtor to pay off all or a portion of the debt owed. These communications may be through letters and telephone calls. While debt collection law firms can also take these steps, they can also further pursue the debt.

Debt collection law firms employ lawyers who are equipped to take the case to court. A lawyer can file the necessary paperwork and effectuate legal service so that the debtor knows that a court date on the matter is pending. Many times such lawsuits result in default judgments against the debtor. The debt collection law firm can then take additional action once it has a judgment, including garnishing the debtor’s wages, placing a lien on un-exempted property and collecting profits from rental or business income.

A primary consideration when making this decision is how quickly the entity may be able to recover the debt. In many cases, debt collection agencies attempt to collect the debt but must then turn it over to a debt collection law firm for legal action. Additionally, debt collection agencies may be hesitant to turn the debt over even if there is no sign that they will be successful because it must then pay a substantial fee to the debt collection law firm. This means that a debt collection agency may have debt accounts for months or years without ever having success.

In contrast, a debt collection law firm may be quicker to sue on the unpaid debt and therefore recover it faster than a debt collection agency. Debtors who understand the limitations of debt collection agencies may be more afraid to ignore communications from lawyers if they are afraid that they will be sued.
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Before making a final decision, a creditor should talk with a reputable debt collection agency and a debt collection law firm in order to make a fair comparison between the two entities. The size of the balance owed, the type of debt, the potential fee charged and the speed by which the creditor wants to be repaid are all factors that can impact the decision.