As the recession drags on, consumers who have paid their bills with the help of unemployment insurance find their benefits expiring. More than five million unemployed Americans are struggling to keep afloat as sources of emergency funds, including savings, retirement accounts, and home equity lines of credit have dried up. At the same time, businesses are suffering and failing due to the lack of consumer spending. Increasingly more businesses rely on collection agencies to recover unpaid receivables in an effort to manage their cash flow. So, how effective are collection agencies in the current environment?

Collection Agencies Have Traditionally Been Very Effective

According to a report published by the ACA, a debt collection trade group, collection agencies were responsible for collecting $39.3 billion of more than $51 billion in outstanding debt in 2005, the latest year for which statistics are available. But consumer credit debt is falling, in part because consumers are choosing to spend less, and in part because banks are reducing credit limits on credit cards, in some cases by up to 50%. So, it remains to be seen whether collection agencies will be as effective percentage-wise in 2009 as they have been in looser credit markets. However, if past performance is an indictor of future success, businesses are wise to consider using collection agencies, and it seems they are doing just that.

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Is This the Right Time to Hire a Collection Agency?

There are plenty of reasons that collection agencies are busier than ever: the 2005 legislation making it more difficult for consumers to file for bankruptcy and a steady increase in identity theft that is creating headaches for banks and consumers alike. The fact is that collection agencies are busiest when money is tight. Yet their success in collecting declines at just the same moment. It's something about getting blood from a turnip. So, is this the right time to hire a collection agency? Here are some factors to consider:

1. The majority of consumers want to do the right thing in meeting their financial obligations, if for no other reason than to protect their credit scores. So, they are often willing to pay or negotiate with the initial lender or the collection agency. When conscientious consumers truly do not have the ability to pay, they will not pay a collection agency any more readily than they will pay the original lender.
   
2. The initial lender has more leverage in demanding payment than does a collection agency, as all collection agencies are subject to the Fair Debt Collection Practices Act, whereas initial lenders are not bound by this legislation. That is not to suggest that initial lenders should be threatening or belligerent just because they can be, but rather that there may be more opportunities for the lender than for an agency to contact a debtor.
   
3. The longer a debt remains outstanding, the less likely it is to be paid, so the best opportunity for recovery is always with the initial lender. That said, there may be cash flow, tax or other advantages such as reduced need for labor, to move outstanding receivables to a collection agency sooner rather than later.

Ultimately, the decision to employ a collection agency involves all the factors mentioned above, plus consideration of timing, cost of money, customer retention, and cost of the collection agency service.

Sources: 

Creditcards.com

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