Collection costs are expenses associated with recovering debt from a borrower who has defaulted, such as fees charged by collection agencies and attorneys. Borrowers are typically responsible for paying these costs, which can include postage, phone calls, and attorney fees. If a borrower misses two payments in a row, most creditors will declare the loan in default and trigger the collection process.
A collection cost is any cost associated with the recovery of debt on which the borrower has defaulted. Items such as fees charged by collection agencies and attorneys, for example, are collection costs, as are the various costs involved in collecting debt through the legal process. Other costs associated with lending, such as the cost of obtaining credit reports from potential borrowers, are related to the loan decision, not collection, and are therefore not collection costs. Similarly, the routine costs of collecting a debt that is current (printing payment coupons or issuing receipts as payments are made) are also not considered collection costs.
When a consumer borrows money, finances a purchase, or applies for a line of credit, they typically sign an agreement to repay the borrowed money, with interest. Most of these agreements include default provisions, which outline steps the lender can take if the borrower fails to pay the debt as agreed. The default provision usually contains a clause stating that the borrower must pay the cost of collection, that is, all costs incurred by the lender in trying to collect the unpaid debt.
As long as the borrower pays at least the minimum amount due, on time, the loan is considered good standing. It usually takes a while before a creditor considers a loan delinquent, for example, issues like a single late payment usually don’t lead a creditor to declare the loan delinquent. Generally, however, if a borrower misses two payments in a row, most creditors will declare the loan in default and trigger the collection process.
When lenders hire outside collection agencies to collect an unpaid debt, the collection agencies keep track of the costs they incur to collect the debt. Postage paid to mail a collection notice, for example, is one such collection cost, as is the cost of making calls to the borrower. However, in many cases, the collection agency will simply add a flat fee or percentage of the debt to be collected instead of itemizing the expenses.
Another cost of collection is attorney fees. If the collection agency is unsuccessful in collecting the debt, the original lender will refer the case to a lawyer, who will continue collection efforts, using the threat of a lawsuit to persuade the borrower to pay up. The attorney generally has the right to negotiate with the debtor, and the amount negotiated is the full amount owed to the lender plus collection costs added by the collection agency and the attorney. If the case goes to court, the amounts are less likely to be settled through negotiations. If the lender’s attorney wins the case, the court orders the debtor to pay the amount owed, which is usually the full amount owed to the lender, plus attorney’s fees and court costs.
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