What is Debt Recovery?
- Author Kim B. Brandon
- Published June 29, 2010
- Word count 513
Debt recovery is the act of collecting on an outstanding debt from a debtor. A debtor can either be an individual or a business. In general debt collection is carried out by a debt recovery agency or by the business to whom the debt is owed. What normally happens is that if a company is unable to collect on a debt themselves, then they will turn it over to a debt recovery agency. However, there are several forms of debt recovery firms around and hiring the right one will determine how much or how little of the debt you will eventually recover.
A first party debt recovery agency is one that is actually a subsidiary of the company to which is owed the debt. The company essentially has a debt recovery branch in order to maintain the cordial terms of the business relationship that they have with their customers. When a business operates a debt collection division, they will generally get involved in the defaulting process much earlier on and will try to work out a solution or a compromise so that they get their money and retain their client.
A third party debt recovery agency is a collections firm that had nothing to do with the original contract between the debtor and the company to which they own the money. The third party debt recovery agency is usually hired on a consignment basis, for a percentage of the debt owed or for a small fee. The percentage owed if the debt is collected can range between 10 percent and 50 percent depending on the agency hired and the kind of tactics being used to collect on the debt. Although many of these contracts are based on a "no-collection, no-fee basis", many of them will demand a payment if the company decides to cancel the contract before the debt has been collected.
Another common practice and one that is increasing in popularity is the sale of debt to a debt recovery agency. What usually happens in such a case is that the company will sell the debt to the agency at a fraction of the cost of the debt. The company then absolves itself from the debt owed. The collections agency, if they are able to collect on the debt stands to make a tidy profit. However, the sale of debt has resulted in some rather unscrupulous collections methods that have necessitated the writing of laws to govern the fair collection of debt. In the United Kingdom debt collection falls under the Consumer Credit Act while the in the United States the law governing debt collection is aptly titled the Fair Debt Collection Practices Act.
Debt recovery is crucial to businesses that would otherwise lose out on millions every year through defaults. Although a business might not recover every penny that they are owed by using a debt recovery agency, they are at least assured of getting back some money. The only tricky part to debt recovery is knowing when to cut your losses and pass on a delinquent account to the debt collection firm.
Kim Brandon writes articles about debt collection and debt recovery companies. If you would like to know more regarding debt collectors, collection agencies and business debt in the United Kingdom, read the buyers guides on Debt Collections Agencies.
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