Debt collection is something most of us are familiar with. Even those of us who have never had debts sent to collection understand the principle. Collection agencies take over debt collection efforts from creditors in exchange for some sort of monetary compensation. Some collection agencies buy the debts they pursue while others work on consignment.
The difference between buying debts and working on consignment is as stark as night and day. Ultimately, the creditor gets to decide the best path forward. There is no right or wrong.
When Debts Are Purchased
A collection agency buying debts is exactly as it sounds. Let’s say you own a company and one of your customers hasn’t paid his bill after 90 days. He is 60 days past due and shows no signs of paying up. So you send the bill to collection.
Your collection agency proposes to buy the debt from you. Selling means being done with it forever. Once sold, you won’t have to worry about the debt again. But wait. Selling outstanding debts comes at a cost. That cost is a certain percentage of the total value.
Less Than Face Value
Collection agencies in the business of buying bad debts never pay face value for them. They can’t afford to. They need to assume they will not collect the entire amount, plus they must cover their own costs and make some profit. The only way to do so is to buy debts at a discount. As the creditor, you may have to settle for 50% or less.
Debts Are Transferable Assets
Perhaps you are wondering how debts can be bought and sold. It is a matter of legal recognition. According to the law, a debt is an asset similar to stocks, bonds, and even commodities. As an asset, it can be freely bought and sold among parties.
To be honest, it is probably easier to sell a judgment to a collection agency as compared to selling in general debt. Why? Because a judgment is actually a court decision. With it comes access to certain legal tools not made available for general debt collection. Judgments are more valuable because debt collectors have more avenues for success.
Collecting Debts on Consignment
Instead, you contact another collection agency that claims to work on consignment. What does that mean? First, you retain ownership of the debt. Second, the collection agency goes to work on getting you as much money as possible. Their fee is calculated as a percentage of the total amount collected.
You still won’t get full value for the debt. But your chances of getting more through the consignment model are pretty good. The experts at Salt Lake City’s Judgment Collectors explain why. Judgment Collectors specializes in judgments, by the way.
They say that the consignment model guarantees a collection agency doesn’t get paid if they don’t collect. Given that their fee is a percentage of the total, it is in their best interests to collect as much as possible. A larger total collection means more money for both of you.
Now you know the difference between buying debts outright and collecting them on consignment. If you have outstanding debt headed to collection soon, do your homework. Make every effort to understand the business model of the collection agency you choose to go with.
In the end, your goal is to get as much money for those outstanding debts as possible. It is up to you to choose a collection agency capable of maximizing that amount.