Sending one of your clients to collections can be tough, but getting the money you're owed is necessary.
Recent studies show that one in three businesses feel that late payments are one of the biggest threats to their financial survival.
This comprehensive guide outlines the collections process, what it entails, and offer some tips. Plus, we discuss collections agencies in case you want to outsource the stressful job of collecting unpaid debts.
What Does It Mean to Send Someone to Collections?
Sending a debt to collections is the process of pursuing legal action to collect a debt.
When a debt goes to collection, it is because the debtor did not pay the bill and the creditor has decided to take legal action.
The first step in collections is usually sending a letter demanding payment. If the debtor does not respond or pay, the creditor can hire a collection agency or take the debtor to court.
In most cases, the creditor will win if the case goes to court and the debtor pays the debt plus interest and fees.
How Do Collections Work?
The collections process begins when a creditor decides to turn over unpaid debts to a collection agency.
They contact the debtor and try to collect the debt on your behalf. Also, they may take legal action if the debtor doesn't pay.
There are several steps that collection agencies typically take. They don't jump straight from calling someone to immediately filing a lawsuit against them for a mere $500.
First, they will send a demand letter, which gives the debtor a certain amount of time to pay the debt. If the debtor doesn't respond or cannot pay, the collection agency may try to contact the debtor by phone.
If the debtor still doesn't respond, the collection agency may take legal action, such as filing a lawsuit or garnishing wages. However, this typically only happens in severe cases or when they owe a large debt.
All in all, we know that the debt collection process can be stressful for both creditors and debtors. However, understanding how the process works can help to make it less daunting.
Learn more about debts on your credit report
What Happens When a Bill Goes to Collections?
Initially, the business or debt collection agency may contact the debtors by phone, mail, or in person to try to collect the debt.
They may also contact friends, family, or employers to get information about them.
Typically, they'll call debtors to explain what the situation is and what further action they will take if the person continues to avoid paying.
What to Consider Before You Send Someone to Collections
While we know how frustrating it can be for someone to be behind on their payments to you, sending clients to collections should always be a last-ditch effort as it can significantly affect their credit score and financial life.
Before you send it to collections, there are a few things you can do to try and get your client or the entity who owes you to pay their bill.
- Make sure you have a valid reason for sending the person to collections. This usually means that they have failed to pay their debt after multiple attempts to contact them and resolve the issue.
- Try to work out a payment plan with the customer. It's always best to agree with the customer before taking further action. See if they're willing to set up a payment plan or make a lump sum payment.
- Send a formal demand letter. This document states the amount of money owed and gives the customer a specific timeframe to pay it back. If you don't receive payment after sending a demand letter, you can proceed with sending the account to collections.
- Choose a collections agency. There are many different agencies, so take some time to research your options. Find one that is reputable and has experience collecting the type of debt you're owed.
Rules for Sending Someone to Collections
First, you must notify the person they owe money and how much they owe.
This notice should give them at least 30 days to pay the debt.
You can send unpaid debts to collections to an agency if they do not pay within that time. Most experts recommend waiting 90 days after the invoice is due to send them to a collection agency.
Finally, keep records of all correspondence to prove that you followed the proper procedures if there is any dispute.
How to Send Someone to Collections
Before you send someone to collections, you'll need to have all the necessary documentation.
This includes any invoices, receipts, contracts, or other documentation proving the debt's existence.
You'll also need the contact information for the person or business you're trying to collect from.
Once you have everything in order, you can begin shopping for a collections agency.
We'll go through how to find a collection agency below. Basically, you’ll find the right agency for your needs and then turn the case over to them. They'll take over everything from contacting the person who owes you money to potentially taking legal action.
What You Should Avoid in the Collection Process
Do not use abusive language
First and foremost, do not threaten the customer or use abusive language. This will only worsen the situation and could lead to legal action against you.
When sending someone to collections, be polite and firm. Explaining the situation and providing documentation can help reduce the chances of legal action.
Do not threaten the person
Do not threaten the person with legal action or send them any threatening letter. This could be harassment and lead to legal action against you.
Avoid discussing the person's debt with anyone else
This is a private matter between you and the person; you cannot and should not share it with anyone else.
Avoid communicating with the debtor through third parties such as family members or friends. The goal is to communicate directly with the debtor to reach a resolution.
Don't try to negotiate by yourself
Additionally, if you've already tried to collect the debt and haven't had any luck, then do not try to collect the debt yourself. This is illegal in many states and will only result in wasted time and effort on your part.
Don't call the debtor insistently
Calling the debtor insistently or contacting their friends or family members can only make them less likely to want to cooperate.
Instead, try sending polite letters or emails and be patient in waiting for a response. If you need to speak with the debtor over the phone, be respectful and understand their situation.
When Should You Hire Debt Collection Agencies?
The answer is simple when self-attempted invoice collection efforts have failed and the amount owed is significant.
Hiring a collections agency can save you time and hassle while increasing the chances of getting paid.
Also, consider a collection agency when:
- When you've tried contacting the debtor multiple times, and they haven't responded
- When the debtor ignores your letters and calls
- When you don't have time or resources to pursue the debt yourself
How to Find a Collection Agency
The best way to find a collections agency is to ask business associates or friends for recommendations.
Another way is to search online. Many websites list collection agencies by state.
Once you have found a few agencies, you should call each one and ask about their rates and services. Be sure to ask whether they offer a free consultation and to take advantage of that free consultation to ask about their experience with your situation.
You should also ask whether they are a member of the Better Business Bureau.
Collection agencies that are members of the BBB have agreed to adhere to certain standards of conduct, so you can be sure they will follow fair debt collection practices.
Finally, you should check with the local chamber of commerce or consumer protection agency to see if there are any complaints against the collection agency you are considering using. This will help you find a reputable collection agency that can help you get the money
Collection Agency Fees
Collection Agency fees can amount anywhere from 33% to 50% of the debt owed.
When a creditor hires a collection agency, the fees that the collection agency charges are generally based on a percentage of the amount of the collected debt. The fee can range from as low as 33% to as high as 50%, but it is usually in the 40% range.
The collection agency may assess other charges, such as an initial setup or monthly maintenance fee.
Do Collections Affect Credit Scores?
It depends on the creditor and how they report the account to the credit bureau. Generally speaking, if a debtor falls behind on payments, the creditor will report the account to the credit bureau.
When a creditor creates a collection account, it appears on the debtor's credit report. This can cause the debtor's credit score to drop by as much as 100 points. The impact of a collection account diminishes over time, but it can stay on the debtor's credit report for up to seven years.
However, if the debtor pays off the debt or catches up on payments, the creditor may remove the account from their reporting altogether. So it really depends on each individual case.
Learn more about debts on your credit report
What is collections?
Collections in debt are agencies that purchase delinquent debt from creditors at a discount.
The agency then tries to collect the full amount of the debt from the debtor. If they are successful, they make a profit on the transaction. If they fail, the agency takes a loss.
Can I send someone to collections?
Yes, if you have someone who owes you money and is not paying, you can send them to collections. However, as mentioned above, you must ensure the debt is actually owed to you and that enough time has passed for you to make the official claim.
What do you need to send a debtor to collections?
First, you'll need the original bill in collection or invoice that includes the amount owed, the date of service, and the name and contact information of the person or business that owes you money.
You will also need to send a "notice of intent to collect," a formal letter stating the money due and what will happen if the debtor does not pay the debt. Once you have all of this documentation in order, you can begin sending the bill to collections.
What will the debtor experience when sent to collections?
A few things can happen when you send a debtor to collections. They may try negotiating a payment plan with you, dispute the debt, or stop communicating with you altogether.
If the debtor does not respond or cannot afford to pay the debt, the creditor may take legal action to recover the money. This can involve filing a lawsuit, garnishing wages, or seizing assets.
How much does it cost to send someone to collections?
This depends on the debt collection agency you work with. However, the standard debt collection fee is between 20% to 40% of the total amount owed to you.
What is the minimum amount to send a bill to collections?
Because debt collectors work to receive a percentage of their debt, the minimum amount you can send debtors to collections is usually $1,000. However, you might find that some collection agencies will collect a debt as low as $500.
How is an invoice sent to collections paid?
There are a few different ways to pay a collections bill to lower your collections balance. The debtor can send a lump sum payment or set up a payment plan (similar to paying taxes).
If the person decides to establish a payment plan, they must make sure and make payments on time each month. They must also consider the fees associated with setting up a payment plan.
Once the bill payment appears, the debtor will receive a letter from the collection agency confirming that they do not have an outstanding debt collection. This will help to improve the credit score and avoid any future complications.