Understanding the Three Core Disciplines of Debt Collection
One of the most important things to understand about the accounts receivables management (ARM) industry is that not all debt collectors are the same. In fact, there are three key types of professionals and organizations that make up the foundation of the debt collection industry: debt buyers, collection agencies, and debt collection law firms.
Each plays a different role in the lifecycle of a debt, and understanding their differences is essential for consumers, businesses, and industry professionals alike.
1. Debt Buyers
A debt buyer is a company or individual that purchases delinquent or charged-off accounts from original creditors, such as banks or lenders. These debts are usually bought for a discount of the original balance to account for the risk of collecting, and once purchased, the debt buyer becomes the legal owner of the debt. Why Are Debt Buyers Used?
When a lender has been unsuccessful in collecting a debt, they may decide to sell it to a debt buyer to recover at least a portion of the amount owed and accelerate the timing of receiving the payment. This allows the lender to reallocate the funds while passing the collection efforts to a new owner that specializes in debt collection.
Typically, this sale happens on a portfolio of overdue debts that include thousands of accounts. Essentially, the original creditor sells a bundle of uncollected accounts to a debt buyer, converting unpaid debts into immediate cash. This is done for several reasons, but mainly because the original creditor is an expert at lending and not debt collection. Debt buyers are hyper-focused businesses with the tools and infrastructure to recover past due accounts at scale.
One Very Important Note
Debt buyers are not always collection agencies. While some may collect on the accounts they purchase, others outsource the collection process to third-party collection agencies or law firms. See below for more information.
2. Collection Agencies
A collection agency is a company hired by creditors or debt buyers to recover unpaid debts. Unlike debt buyers, collection agencies do not own the debts they collect. Instead, they act as service providers, working on behalf of the original creditor or debt buyer to recover money owed as a third-party organization or a first-party extension of the creditor.
Collection agencies typically use phone calls, emails, and letters to contact consumers and encourage repayment. While they play a vital role in the debt recovery process, their authority is limited—they cannot take legal action unless authorized by the debt owner and in partnership with a law firm.
Why Are Collection Agencies Used?
A collection agency is a specialized group of agents working to collect overdue debts. Because of the nature of debt, and consumer protection laws, the collection of overdue debts is highly regulated. These regulations and industry standards put forth by trade organizations like the Receivables Management Association International (RMAI) and ACA International, agencies are scrutinized at every contact point with consumers. For most creditors, it is simply easier to outsource the collections process to professionals who do this type of work every day. For debt buyers, perhaps their scope of business is better suited to outsource collections to a third-party agency after buying the debt.
In either scenario, collection agencies represent the backbone of the ARM industry, making up most of the consumer-facing contact points typical people have with the industry every day.
A Key Difference From Debt Buyers
Most collection agencies do not purchase debt. In a standard third-party collection scenario, the collection agencies are paid a fee or a percentage of the money they recover.
3. Debt Collection Law Firms
The third core group of the ARM industry are the law firms. A debt collection law firm is made up of licensed attorneys who specialize in recovering unpaid debts through legal channels. These firms can represent original creditors, debt buyers, or even collection agencies.
The biggest distinction between a law firm and a traditional collection agency is legal authority. A law firm can:
- File lawsuits against consumers
- Obtain court judgments
- Garnish wages (where legally permitted)
- Negotiate settlements backed by legal leverage
Why Are Law Firms Used?
Because of their legal capabilities, law firms are often involved in cases where other collection efforts have been unsuccessful. If a collection agency does not have an in-house law team, they will typically go to a debt collection law firm to work on specific accounts for legal recourse.
While some law firms are themselves collection agencies, and have a consumer-facing team doing standard third-party pre-legal collections as well as legal actions, debt collection law firms are their own separate category because they have different means from the traditional law firm for acting upon overdue debts.
Why These Differences Matter
Understanding who you’re dealing with—whether it’s a debt buyer, a collection agency, or a law firm—is crucial. Each type of organization operates under different rules, uses different methods, and has different levels of authority.
Some companies may operate as all three, managing every aspect of the debt collection process under one roof. Others may specialize in just one or two areas.
When speaking with or doing business with a debt collection organization, knowing their role can help you:
- Better understand their capabilities and limitations
- Navigate negotiations or legal processes more effectively
Make informed decisions about partnerships, compliance, and risk
Receivables 101 Takeaway
The debt collection ecosystem is made up of multiple specialized players. Knowing the difference between debt buyers, collection agencies, and collection law firms helps demystify how the industry operates, and empowers you to engage with it more confidently.
To learn more about the terms you’ve learned in this article, or to read more in-depth pieces about the financial industry, please visit our other Receivables Series.
Thank You To Our Sponsor, Orion Capital Solutions
Orion Capital Solutions, LLC, headquartered in New York, is a professional, nationally licensed collection agency founded in 2018. With over 30 years of industry leadership experience, Orion provides exceptional services through technology integration and a compassionate team. Committed to aiding consumer financial freedom, Orion offers flexible payment options and creative problem-solving. As a member of RMAI and a Better Business Bureau accredited business, Orion stays abreast of all rapidly-evolving industry changes. Orion’s mission is to deliver trusted debt collection services to creditors while providing accessible payment options.
