Collection agencies are in the business of handling debt collection for clients who either do not want the hassle or have proven unsuccessful in the past. How do collection agencies get paid? That depends on the chosen business model. Believe it or not, some debt collectors work on contingency – just like personal injury attorneys.
You are probably familiar with those TV commercials portraying aggressive personal injury lawyers who promise you don’t pay if you don’t win. What they are advertising is the contingency model. Payment is contingent upon them winning their cases.
The other option for an attorney is to charge a flat rate or hourly fee. Collection agencies that choose not to work on contingency do something different. They purchase debts from creditors. This is completely legal due to the fact that the law considers debt a transferable asset no different from property or securities.
Working on Contingency
Judgment Collectors is a Salt Lake City collection agency that specializes in judgments. Though based in Utah, Judgment Collectors practices in numerous other states including California, Texas, and Arizona. Their business is based on the contingency model.
When a client hires Judgment Collectors, the judgment in question is immediately turned over to the agency. Agency team members begin working on the case right away. In the meantime, the client doesn’t spend another penny on collection. Judgment Collectors incurs all the costs of their work.
If and when the agency collects, they are paid a percentage of the amount collected. That percentage is determined by negotiations between the agency and its client. If Judgment Collectors fails to collect, the client owes nothing.
When Debts Are Purchased
Debt collectors purchasing debts is a different matter altogether. Again, debts are considered transferable assets. A debt is not just money owed in the eyes of law. It is also owned, like property. That means you can sell a debt to a willing debt collector. Here is the thing: you will not get full value for it.
Just like debt collectors working on the contingency model, agencies that buy debt have to get paid. They get paid by collecting. However, these agencies also assume a greater risk by purchasing debts outright. They could spend money buying up debts and never get paid.
Because this is so risky, collection agencies never pay full value for the debts they purchase. They pay considerably less. How much less? That depends on the amount of risk involved. It wouldn’t be abnormal for a $1,000 debt to be purchased by a collection agency for just $500. That begs the question of why a company would sell debts to a collection agency.
Something Is Better Than Nothing
Collecting outstanding debts is rarely an easy task. But from the creditor’s perspective, something is better than nothing. A company that has already spent too long trying to collect outstanding debts would rather get a lesser amount than keep going and ultimately end up with nothing to show for it.
There is risk to both parties when debts are purchased outright. A creditor risks accepting too little for debts that eventually pay off big. The collection agency risks buying debts it will never collect on. The advantage of the contingency model is that it reduces risk to both parties.
Yes, it is possible for debt collectors to work on a contingency basis. There are plenty of collection agencies that have chosen the contingency model. It works well for them. It also works for their clients inasmuch as they are absolved of collection responsibilities after turning their debts over to the agency.