It describes the process used to chase payments of money owed by an individual or a business. Organizations that specialize in debt collection are known as collection agencies or debt collectors.
Most agencies work as agents of the people or organizations that are owed money and generally collect debts for fees or percentages of the total amount collected.
There are lots of different types of collection agency. First-party agencies are generally subsidiaries of the companies to whom a debt is owed. Third-party agencies on the other hand are separate businesses hired by a company to collect debts for a fee.
There are also operations that buy debts by purchasing them at a percentage of their value. They then try to recover the money themselves.
First-party agencies generally become involved in debt collection processes at an early stage and have greater incentive to maintain constructive customer relationships.
They are called "first-party" because they form part of the contract’s first party. The second party is the debtor. A first-party agency will try to collect a debt for many months before transferring it to another, third-party agency or they may sell the debt.
Third-party agencies are so called because they are not a party to the original contracts. Creditors assign accounts to third-party agencies on a contingency-fee basis. This initially costs nothing to the creditor.
However it is dependent on individual service level agreements (SLAs) that exist between creditors and the collection agencies.
What happens is that third-party agencies take a percentage of the debts they successfully collect. This is known in the industry as the potential fee (Pot Fee) on collection. It doesn’t necessarily have to be on collection of the full balance.
Third-party agencies make money only if they are able to collect from the debtor. Dependant on the age and type of debt and how many attempts have previously been made to collect on it, fees can range between 10% and 50%.
In the United States, third-party agencies have to abide by the Federal Fair Debt Collection Practices Act of 1977 (FDCPA).