In many ways the debt collection process resembles the schoolyard game of dodgeball.
When I was attending public school in the Dark Ages--circa 1965--one of the most popular games at recess was dodgeball. I am talking about the kid’s game and not professional dodgeball made popular in the 2004 comedy Dodgeball: A True Underdog Story starring Vince Vaughn and Ben Stiller.
Members of Team A stand on the perimeter of a large circle. Members of the other team, Team B, stand inside the circle. The members of Team A share one volley ball and the goal is to throw the ball and hit members of Team B standing or moving inside the circle. Once hit, a member of Team B, is out of the game. The game is over once the last member of Team B has been hit.
If you owe monies to a creditor then you are a member of Team B standing inside the circle. Your creditor and their collection agents are the members of Team A throwing a ball at you attempting to hit you. My goal is to help you win the game of debt collection dodgeball. This will not be easy and I cannot teach you how to win debt collection dodgeball in a single article.
The mantra for Debt Coach Silverthorn is “Empowering Canadians struggling with debt”. This means it is important for us to share with Canadians some of the fundamental concepts relating to debt collection in Canada. This includes identifying the various players, their uniforms, as well as some of the rules--or guardrails--and referees supervising this process.
For the purposes of this article, I will assume that you have at least one unpaid account and that you have not made a payment on this account for 90 days or more. You are referred to as the consumer—and sometimes as the debtor—in the collection industry.
I anticipate that you will be receiving collection calls. The purpose of a collection call is to persuade you, the consumer, to make a payment on your unpaid account. The individual making the collection call is referred to as a collector—and sometimes a bill collector.
1. Who is the employer for that collector calling you?
I find that people receiving collection calls are often confused about two issues. Firstly, what is the name of the firm employing the collector calling you? Secondly, what is the name of the creditor on whose behalf the collector is calling?
Sometimes the answer to these two questions is very straightforward. In other instances, the answer to these two questions is often beyond the understanding of the average person. The purpose of this next section is to drill down and provide you with the information that you might need to determine not only the name of the collector’s employer but also the name of the creditor on whose behalf they are calling.
a. Who owns your debt?
The first question you will need to ask is which firm is your creditor? Your creditor is the firm to whom you are legally obligated to pay an unpaid account. If your last payment was in the past six months then your creditor is likely your original creditor. An original creditor is the firm that provided you, the consumer, with goods, services or credit.
In Canada today a creditor might sometimes sell a large number of their unpaid accounts—anywhere between 50 and 100,000 accounts—to another firm referred to as a debt buyer, or sometimes a debt purchaser. A debt buyer is a firm that buys the debts owing to others. These debts are referred to as purchased debt.
There are a few original creditors in Canada who will sell their unpaid accounts when they have not received a payment in six months. In contrast, some original creditors never sell their unpaid accounts. The majority of large Canadian creditors, however, will sell their debts as the years go by. It is quite common, for example, for a large creditor to sell their debts once they remain unpaid for more than three to six years.
Sometimes debt buyers will sell a significant block of unpaid accounts. It is possible, therefore, for a consumer’s unpaid account to be sold by their original creditor to a debt buyer and then that debt buyer might, at a later date, sell the consumer’s account to another debt buyer. There is no limit on the number of times that your unpaid account might be sold.
b. What are the two different categories of debt buyers?
To make matters more complicated there are two distinct categories of debt buyers. The best way for me to describe these differences is to use a cycling analogy. A unicycle is a bicycle that only has one wheel. A bicycle has two wheels.
A uni debt buyer has a single revenue stream arising from purchasing debt. London, Ontario-based Canaccede is an example of a uni debt buyer. A bi debt buyer has two revenue streams; (1) a secondary revenue stream arising from purchased debt, and (1) a primary revenue stream arising from collecting debts owing to others.
Some of the collectors working for a collection agency reading this post might be saying to themselves that I am describing their collection agency. And they might be right. Some collection agencies do purchase debt. Not all collection agencies, however, purchase debt.
To summarize, so far we have learned about the distinction between your original creditor and a debt buyer. I have yet to share with you the complete answer to who is employing that collector calling you demanding payment of your outstanding account.
i. Why is the distinction between these two types of debt buyers significant?
You may be asking yourself why should I care about whether the debt buyer whose collector is calling reception at my work three times a day asking for me is a uni debt buyer or a bi debt buyer? Firstly, a third of Canadians are not entitled to any protections under provincial law if the collector calling them works for a uni debt buyer. Secondly, if the collector calling you works for a bi debt buyer then you will be entitled to protections under provincial law
ii. How much do debt buyers pay when they purchase my unpaid account?
People often ask me how much does a debt buyer pay to buy an unpaid account? As a rule of thumb, the longer the period of time that an unpaid account has been unpaid the less the debt buyer will pay for an account. If, for example, the debt has been unpaid for more than six years the debt buyer may be paying less than five cents on the dollar. In contrast, if a debt is sold when it has only been unpaid for six months then the debt buyer might be paying 25 cents on the dollar.
2. In-house collections versus the use of collection agents
Your creditor is either your original creditor or the debt buyer that has most recently purchased your unpaid account. Your creditor has two options when it comes to who can make payment demands to you. Firstly, it can utilize its own employees to make payment demands. Secondly, it can hire a collection agent to attempt to collect the unpaid account.
a. A creditor’s in-house collection department
Most original creditors and most debt buyers have an in-house collection department. Collectors working in an in-house collection department are employees of that firm. When a collector working in the creditor’s in-house collection department is successful in getting an unpaid account paid the creditor receives one hundred percent of the payment.
Creditors use their in-house collection departments to collect the low-hanging fruit. In Canada it is very common for most large creditors to have their in-house collection department attempt to collect an unpaid account for the first six months that your account remains unpaid. This is a very inexpensive way for a creditor to maximize their revenues from their portfolio of unpaid accounts.
b. Description of collection agents
Once an account remains unpaid for six months, however, there is a paradigm shift. These unpaid accounts are no longer low-hanging fruit and it is no longer economical for the creditor to have its in-house collection department attempt to collect these accounts. It is more economical for creditors to place these accounts with a collection agent.
A collection agent is a firm, that is authorized by a creditor, to collect the creditor’s unpaid account. The predominant collection agents in Canada are collection agencies. Total Credit Recovery, Bill Gosling Outsourcing--aka Allied International Credit--Affinity Global, and Metropolitan Credit are some of the largest collection agencies in Canada. It is possible for a lawyer or a law firm to be a collection agent. In Ontario the Law Society of Ontario licences both lawyers and paralegals. In Ontario a paralegal could be a collection agent.
As noted earlier the primary revenue stream of collection agencies is collecting accounts owing to others. Some, but not all, collection agencies purchase unpaid accounts and then attempt to collect these unpaid accounts. If a collection agency purchases your unpaid account when it attempts to collect your account it is doing so as your creditor, and not as a collection agent.
c. Prohibition against assignments to multiple collection agencies
In Canada it is illegal for a creditor to place your unpaid account for collections with more than one collection agency at the same time. A creditor will typically assign your account to a collection agency on a commission basis for a period of several months—often somewhere between six and 18 months. At some point, if your account remains unpaid you should anticipate that your creditor will assign your account to a different collection agency.
An example will help illustrate this.
Quebec City resident Emilee Gagnon has a single outstanding account. She has an unpaid account with one of Quebec’s Caisse Populaire. Last week she was receiving collection calls from ABC Collection Agency—aka ABC Agence de Recouvrement. Today she received a collection call from XYZ Collection Agency—aka XYZ Agence de Recouvrement. Given these facts, I can only assume that the creditor recently recalled her account from Collection Agency ABC and reassigned it to Collection Agency XYZ. Under Quebec law it would be illegal for Emilee’s creditor to assign her unpaid account to these two collection agencies at the same time.
d. How are collection agents compensated?
There are two basic models for the compensation of collection agents. The vast majority of collection work in Canada today uses the commission model. A collection agent earns a commission, or a predetermined percentage of monies actually recovered. If the collection agent fails to recover any monies on an unpaid account under the commission model the collection agent does not earn a penny in revenues.
In some instances, a collection agent is hired on a fee-for-service basis. Under the fee-for-service compensation model the collection agent is paid a fee for its services, plus any disbursements or out-of-pocket expenses. The most common scenario where a collection agent is hired on the fee-for-service model is when a law firm is hired to sue an unpaid account by either the creditor—or in a few instances by a collection agency.
When a creditor hires a collection agent on a particular unpaid account and monies are recovered then the creditor is entitled to 100 percent of the monies recovered less the fee paid to the collection agent. By hiring a collection agent on a commission basis a creditor is receiving less revenues than it would using its inhouse collection department but its expenses have been slashed dramatically because the costs of outsourcing the work to a collection agent on a commission basis are nominal.
In contrast, when a creditor hires a collection agent on a fee-for-service basis the creditor is taking a risk that it will lose money on a particular unpaid account. There is no guarantee that when a collection agent sues a consumer with respect to an unpaid account that it will recover any monies from the consumer.
It is important that Canadians struggling with debt have a basic understanding of the various players in the debt collection arena.
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