When a bad debt goes to a recovery agent, the latter would charge a fee based on the amount to be collected, the time it has been overdue etc. This article discusses the pricing mechanism adopted by recovery or collection agencies for reclaiming an overdue debt.
There are two ways in which the agency does the pricing for debt collection - a contingency pricing and fixed pricing. In the former, the collection agency retains a percentage of the amount recovered as fees while in fixed pricing, the fee is charged on per month basis or per account basis irrespective of the amount collected.
In contingency pricing, the percentage of the collection agencies' commission depends on the size of the debt to be collected, and varies broadly between 10 and 50%, but more commonly between 20 and 40%. The fee percentage may also vary with the time the debt has been overdue, less for under a month old debt and more for debts that are 1 year or more old. The chances of recovery diminish with the age of the debt. Smaller debts attract higher percentage so that it is worth while for the agents to pursue them.
When finalizing a debt collector, it is important to look at the recovery rate of the collector. Recovery rate denotes how much the collector has actually been able to recover the previous debts. It is better to go with a collector with a higher percentage of recovery rates even if the fees are more as the net amount that you receive finally may be more in that case. For example for a 1000 dollars worth of debt, a recovery rate of 70% and a commission of 30%, the net amount that you would receive is $490 whereas a recovery rate of 50% and a commission of 25% would fetch you only $475. Contingency pricing excludes unrecovered debt, but for small value debts, the agents may not be willing to offer contingency pricing.
When there are many delinquent cases pending with a company, fixed rate contracts are better than contingency pricing contracts. In fixed price contract, the agents may charge a fixed amount per month like say $10/month for one year or $120 for 4 accounts in a year etc. They also specify how many requests they are going to file in a year and keep track of them for the amount charged.
For smaller debts, a flat fee agency is often the best choice as collectors that are paid on a percentage and don't make as much on smaller amounts.
