Debt collection agency

What it means

A debt collection agency is a company that, for a fee usually based on a percentage of what is recovered, collects debts on a creditor's behalf or buys them outright. It helps businesses that lack the time, staff or experience for systematic debt collection.

In mandated collection, the debt stays with the creditor and the agency acts on its behalf; in a purchase, the receivable is assigned to the agency at an agreed price, often well below face value. The creditor gets money immediately but gives up part of the amount.

The agency first tries out-of-court collection: reminders, calls and instalment agreements. If that fails, it can arrange court proceedings such as a payment order and then enforcement, with costs handled under the agreement with the creditor.

How it works in practice

When choosing an agency, compare fees, success rates, how it communicates with debtors and its reputation. Aggressive practices can damage customer relationships and the creditor's name, so agree communication rules and regular reporting.

For business-to-business debts, the creditor is entitled to fixed recovery compensation and late payment interest. The agency can claim these together with the principal, significantly increasing the amount recovered.

The agency's fee is a deductible expense for the creditor, and collection services are subject to VAT. When a receivable is sold at a lower price, the creditor may under certain conditions deduct the loss on assignment, which must be assessed under the Income Tax Act.

What to watch out for

Collecting from consumers is subject to strict consumer protection rules. An agency may not intimidate or harass debtors, publish their debts or demand disproportionate fees, and breaches can lead to fines and liability for the creditor.

If a debt is disputed, for example because of a complaint about goods, aggressive collection can provoke a counterclaim and litigation. Before handing a debt to an agency, check that it is undisputed and well documented and not at risk of becoming irrecoverable through limitation.