Collection Agency v. Debt Buyer

Collection Agency v. Debt Buyer

By Attorney Patrick C. Burpee

Within the debt collection industry, there are primarily two types of collectors: those who work on commission and get a percentage of the debt collected, the so-called "collection agency," and those that purchase debt at a discount, or the so-called "debt buyer."

Commission-based collection agencies do not own title to the debt they attempt to collect on behalf of their creditor clients, who are usually credit grantors such as banks, credit card companies, hospitals, retail stores, or federal, state and local governments. Under the laws governing Washington State, collection agencies, in their collection efforts, must comply not only with the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Consumer Protection Act, but also with the Collection Agency Act, which, among other things, requires a valid state-issued collection license. Many out-of-state collection agencies attempting to collect in Washington fail to obtain the requisite license from the Washington State Department of Licensing, and thus, are immediately in violation of the Washington Collection Agency Act and the Washington Consumer Protection Act.

On the other hand, although debt buyers must comply with nearly all of the laws referenced above and other laws governing collection agencies, debt buyers are not presently required to obtain a license before attempting to collect their debts in the State of Washington, nor are they required to comply with other requirements of the Washington Collection Agency Act. Nothing prohibits a debt buyer, however, from obtaining a collection agency license, even if they are not a collection agency, in order to deter frivolous lawsuits. Debt buyers purchase their debts from credit grantors such as banks and credit card companies which have essentially chosen to accept a lump sum for their defaulted debt from the debt buyer, rather than rely on the uncertain recovery efforts of the commission-based collection agency. Debt buyers purchase bundled debt portfolios, typically for much less than the original debt in default.

Interestingly, a recent survey conducted by PriceWaterhouseCoopers, LLP and paid for by ACA International, found that of the $141 billion in bad debt charged off by private businesses in 2005, third-party debt collection agencies recovered about one-third of that debt, or approximately $51.4 billion. Only $2.3 billion of the $51.4 billion collected in 2005 was recovered by so-called debt buyers. In other words, the majority of debt collected in 2005 was the result of commission-based third-party debt collection agency activity rather than from collectors who purchased their debt from credit grantors. Not surprisingly, the majority of consumer complaints to the Federal Trade Commission concerning debt collection activities result from the actions of collection agencies, rather than debt buyers.

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