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Engaging a Debt Collection Agency: Legal Considerations for Businesses

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As a business owner, a core part of your day-to-day operations is engaging with customers and maintaining profits. However, sometimes it can be tricky to get your customers to pay for their goods or services on time or even to pay at all, leaving unpaid debts. If this is the case, you may consider engaging a debt collection agency to chase outstanding debts for you and avoid having to bring a claim in court. It is essential for you to consider issues such as legal ramifications before enlisting an agency to carry out your debt collection process. This article will explain legal considerations when your business engages a debt collection agency to carry out debt collection practices.

What is a Debt Collection Agency? 

A debt collection agency is a third-party company that can recover the debt owed to you by customers or, if applicable, other businesses. This debt can arise due to, for example, overdue invoices where customers have not paid but the agreed payment deadline has expired. Alternative names for these companies are debt collectors or debt recovery services. 

Importantly, using a debt collection agency means that you no longer need to take away time from running your business to communicate to customers that you are owed debt. Instead, the agency will usually do this for you until they can resolve the debt problem. In addition, hiring an agency sends a stern message to your customers and encourages good practice from them. They also help you avoid paying costs such as interest on overdrafts to cover your business for the money owed. 

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When you decide to engage a debt collection agency, there are some key legal conditions to consider. We take a look at some of these below.

1. Debt Recovery Costs

When you engage a debt collection agency, they will normally charge you a fee for doing so. You should consider that these are costs you can legally recover, although to qualify, they must be ‘reasonable’ under the law. Whilst this is ambiguous, you need to consider it in terms of the costs an agency is suggesting charging you. Usually, they will charge you a commission on each debt they chase; it is essential to your business to recover these charges.

2. Complying with Laws

You may decide to engage a debt collection agency because they should have the knowledge and experience to comply with the relevant laws for collecting debt. This may be more efficient than manually ensuring legal compliance. However, for this benefit to exist, you must still be confident it is a reputable and established firm.  For example, if the agency collects debt from your consumers, they must abide by the Financial Conduct Authority (FCA) rules. This includes, for instance, that a debt collection agency must correctly relay what will happen if the customer does not pay the debt. 

Furthermore, some debt collection agencies are members of trade associations such as the Credit Services Association (CSA). These can detail codes of practice they expect their members to comply with. Therefore, researching and checking the firm’s reviews is essential.

3. Legal Powers

A further consideration when engaging an agency for your business is not just being aware of their legal obligations but their legal powers. This will ensure you have realistic expectations of what they can do for you. In particular, a key point to understand is although that the agency will pursue the debt you are owed persistently, it cannot force your debtor to pay the debt they owe you. This can only occur once a court has issued a judgment and their officers enforce it. 

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Key Takeaways

If your business is owed a debt from others, such as your customers and potentially other companies, you may decide to engage a debt collection agency. This body will collect your debt for you, which can save you time and money. However, when you engage the agency, there are some legal considerations for your business to note. Three of these key legal considerations are:

  • whether the debt recovery costs are reasonable;
  • whether the firm complies with the law and is reputable; and
  • the extent of a debt collection agency’s legal powers.

If you have any further questions about engaging a debt collection agency, LegalVision’s experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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Clare Farmer

Clare Farmer

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