Whenever a debtor fails to meet a justified claim and the creditor commissions a third party to collect the debt, this is referred to as debt collection. There are two basic types of debt collection.
Debt collection with sale of receivables
The creditor can commission a debt collection by selling his claim to a collection agency. To do this, he signs a declaration of assignment and thus cedes all rights to the receivable to the collection company. In return, he receives part of the original receivable paid out immediately. The new owner assumes the risk from the original creditor that the receivable may not be collected, or only partially. From then on, the new owner handles the collection. The collection agency collects the outstanding amount from the debtor, acting on its own account. The collection agency earns a profit on the one hand through fees and expenses that it may charge the debtor, but on the other hand also by collecting the entire debt, in contrast to the payment to the original creditor.
Collection on behalf of the creditor
Alternatively, the creditor can also commission a collection agency to carry out the collection on his behalf. In this variant, ownership of the receivable remains with the creditor. The collection agency collects the entire debt and charges fees for these collection services. These fees and other expenses are charged to the debtor.
Payment providers use debt collection for direct debits
In principle, collection services are charged when a payment is made by direct debit. If there are no funds or if there is an objection from the account holder, a return debit note is issued. The payment service provider must have the returned direct debit collected by a collection agency or a law firm. With payment providers, collection by direct debit including collection is common for a discount of between six and ten percent. The discount relates to the amount cleared. This also includes all costs for returned direct debits up to the second reminder letter. The legal dunning procedure, on the other hand, is not part of the payment provider’s scope of services and must therefore be initiated by the online merchant himself.
Opportunities and risks
Debt collection gives creditors an additional option to the commercial dunning procedure for collecting their receivables. However, there is no guarantee that the debtor will respond to the activities of a collection agency or lawyer. Many collection agencies also offer other services, such as obtaining credit reports or applying for a court order to pay. The creditor conserves his resources and can take care of his core business. However, there is a financial risk associated with debt collection. If the collection agency fails to collect the money, for example because the debtor has submitted an affidavit, the collection agency cannot charge the creditor for its expenses. These must therefore be borne by the creditor. In most cases, the creditor must already bear the expenses when commissioning the collection agency. If this is not the case, the collection agency automatically deducts its expenses from incoming payments from the debtor before forwarding the remainder to the creditor.
Collection by a lawyer
In contrast to conventional debt collection, a lawyer is authorized to conduct the contentious proceedings before the local or regional court on behalf of the creditor if the debtor objects to the claim or such an objection is to be expected. This contrasts with the often much higher costs of debt collection that can be incurred by a lawyer.
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