How Much Does It Cost To Send Someone To Collections

How Much Does it Cost to Send Someone to Collections?

Sending someone to collections is a serious step with significant financial implications for both the creditor and the debtor. It's not a simple process with a single, easily defined cost. Instead, the cost varies widely depending on several factors. Let's break down the potential expenses involved.

Costs for the Creditor

The creditor (the person or company owed money) incurs several costs when they pursue collections:

1. Internal Costs:

• Staff Time: Employing staff to manage the account, attempt contact with the debtor, document the process, and ultimately hand it off to a collection agency takes considerable time and resources. This includes salaries, benefits, and overhead. The cost here depends entirely on the size of the business and how many accounts are handled internally before external help is needed.

• Legal Fees (Potentially): If the debt is legally disputed or requires court action, legal fees can quickly escalate the costs. This can involve everything from initial consultations to full-blown litigation.

2. External Costs:

• Collection Agency Fees: This is often the most significant expense. Collection agencies typically charge a percentage of the collected debt (usually between 25% and 50%), sometimes with additional fees. The higher the debt, the higher the fee.

• Attorney Fees (If Litigation Is Necessary): Similar to internal legal costs, if a collection agency needs to take legal action, these fees are significant and can be unpredictable.

Costs for the Debtor

The costs for the debtor are less direct but can be devastating:

• Damaged Credit Score: This is arguably the most significant cost. A collection account severely impacts credit scores, making it difficult to obtain loans, rent an apartment, or even get certain jobs. Rebuilding credit can take years and require diligent effort.

• Collection Agency Harassment: Dealing with repeated calls, letters, and potential legal action can be incredibly stressful and emotionally taxing. This stress is a hidden cost with long-term consequences.

• Potential Wage Garnishment or Bank Levy: In some cases, creditors can legally seize a portion of a debtor's wages or bank account to recover the debt. This can have significant repercussions on their financial stability.

Factors Affecting Cost

The total cost of sending someone to collections depends on several interrelated factors:

• Amount of Debt: Larger debts generally lead to higher collection agency fees and potentially higher legal costs.

• Type of Debt: Different types of debt (medical, credit card, student loan) may have varying collection practices and legal avenues.

• Debtor's Cooperation: A cooperative debtor might reduce the overall cost by settling the debt quickly. Conversely, a non-cooperative debtor will likely increase the expense for the creditor.

• State Laws: State laws vary regarding collection practices, affecting the legal costs and available options.

Conclusion

There's no simple answer to "how much" sending someone to collections costs. It's a complex process with substantial financial and emotional ramifications for both the creditor and the debtor. The best approach is to always attempt to resolve debt amicably before resorting to such extreme measures. Open communication and exploring options like payment plans can often prevent the high costs associated with collections.