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In House Collections Versus Using a 3rd Party Collections Agency

Dec 08, 2020 MicroBilt News

In House Collections Versus Using a 3rd Party Collections Agency

During any economic cycle, a certain amount of bad debt is just part of doing business, but in the current economic climate, lending has become more challenging. COVID-19 has led to widespread unemployment with unemployment numbers more than doubling (from 6.2 million unemployed to more than 14 million unemployed) between February of 2020 and May of 2020.

If you are a creditor and you are struggling to recover money on bad loans, you may be asking yourself "should I try to recover on the loan using my in-house staff or should I work with a third-party collection agency?" Of course, there are some advantages and some disadvantages to both options.

Benefits of In House Collections

An in-house debt collection department often referred to as first-party debt collectors can offer some advantages over a collection agency because it is possible to act more rapidly on delinquent accounts. In light of the current COVID-19 situation, this means you can act quickly to find out if this is a temporary setback or if there are other arrangements you can make with your clients to get things back on track.

Since contingency costs for third party collection agencies range from 15 to 40 percent, in-house collections can mean more money in your pocket, provided you are successful in recovery on the delinquent accounts.  Plus, in-house collections allow you to better manage the customer relationship throughout the recovery process. An in-house collections department also gives you a far better opportunity to retain your customers, provided they are worth keeping.

Setting up a first-party debt recovery program is not a small task and requires a good deal of investment. You need the following to be effective at in house collection.

  • A solid infrastructure.
  • A well-managed process.
  • Access to accurate consumer information to assist you in locating the debtor and the debtor's assets.

Skip tracing software from Microbilt can be instrumental in providing you with the information you need to locate debtors and identify assets. For the purpose of debt collection, skip tracing can be an invaluable tool for businesses considering in-house or first-party debt collection efforts.

Before you dive in though, you should be aware that laws concerning debt collection efforts are subject to change. In fact, new proposals were put forth by the Consumer Financial Protection Bureau (CFPB) that will modify the current gold standard for debt collection activities known as the Fair Debt Collection Practices Act (FDCPA). The following are among some of the suggested changes proposed.

  • Restrictions on the number of phone calls allowed per week for debt collection purposes.
  • Limits on how collectors can use technology in their collection efforts.
  • Rules barring collectors to threaten litigation on debts that have exceeded their statutes of limitations.
  • Requirements that collectors provide itemized accounts of the debt explained in a manner that is easy for consumers to understand.

When you have access to the right tools, you’re well-positioned to begin operating in-house for the collections aspect of your business. Plus, have new opportunities to build better relationships with customers who may be struggling, financially, during COVID-19. Keep in mind that the pandemic will one day be over, and people will return to work and most will resume payments as a result.

Considerations for Using Third-Party Debt Collection Agencies

A third-party debt collection agency is not directly involved with the issuing of credit.  This independence can often make third-party debt agencies more effective than in-house debt collections because the collection agency's sole purpose is to recover as much of the debt as possible.

The rate and method you pay a third-party debt recovery company can vary greatly and depends on the service agreement between you and the agency. In some cases, the third-party agency will be paid a contingency fee - a commission on any debt they recover.  In these cases, where the debt collector only gets paid when they recover the assets, there is a higher incentive to provide efficient and effective service, which can result in higher conversions for you.  In other cases, the third-party debt collection agency may be willing to buy your delinquent debt and taking the risk of recovery on the debt portfolio.

Partnering up with a third-party collection agency also frees you to focus on your core business operations and reduces your overhead by eliminating the costs of staffing and training.

Which Choice is Best for Your Business?

This is a decision every business will have to make on its own. Are you willing to commit the time, energy, and money into building an effective in-house team of collectors? This is something not all businesses are willing to do. However, making the decision can mean more money in your pockets and better opportunities to develop loyal customers by working with them through the trying times COVID-19 represents for so many people across the country.

If you decide to take the plunge and move your collections efforts in-house, Microbilt is ready to help you with many tools to help you in your debt collections and recovery efforts. Contact us today to learn more about the tools we offer and how they can help your business with its collections needs and so much more.