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Collection Agency Laws

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What Is a Collection Agency?

A collection agency is an entity that specializes in collecting debt payments on behalf of other businesses or individuals. They are usually hired by businesses to collect outstanding payments that are owed to them by consumers, or sometimes by other businesses.

Collection agency laws generally cover the scope of the agencies’ authorities, and what types of practices they can perform when engaging in collections. While these laws may vary by state, collection agencies generally cannot engage in acts that are illegal, deceptive, or fraudulent in order to collect business debts. 

In the process of collecting debts, the agency must generally maintain well-kept records from both the lender and the borrower, in order to render accurate and truthful accounts. Disputes over business debt can also require the assistance of a collection agency. Collection agencies are also commonly used by small businesses.

What Are Some Common Legal Disputes Involving Collection Agencies?

Disputes with collection agencies arise somewhat frequently.  This is mostly due to the fact that the borrower may continue to refuse payments, in which case legal action might become necessary.  Disputes are also common between the collection agency and the business that initially requested their services. 

Some common legal disputes involving collection agencies may include:

  • Borrower’s continued refusal to make debt payments
  • The hiring company suing the collection agency for not making diligent efforts to collect the debt (the agency is usually bound by contract to make reasonable efforts to collect the payments)
  • Illegal, deceptive, or unethical collection tactics (such as harassment or fraud)- these can lead to a lawsuit between the borrower and the agency
  • Unauthorized practice of law-  a collection agency can often be found guilty for unauthorized practice of law if they attempt to give legal advice or if they step outside the scope of their collection practices
  • Principal/Agency relationships:  In some cases, the collection agency actually assumes a principal-agent relationship with the business that they’re collecting for.  In the event of a violation, the consumer may then sue both the business and the collection agency

Are Businesses Creditors Responsible for Violations Committed by a Collection Agency?

As mentioned, the business and the collection agency can sometimes take on a principal-agency relationship, in which the collection agency acts on behalf of the business as an agent. However, this type of arrangement will usually be stated explicitly in the contract between the business and the agency. 

Otherwise, business creditors are generally not responsible for any violations, torts, or crimes committed by the collection agency. Basically the collection agency usually remains an independent contractor that is responsible for its own conduct. 

Therefore, determining liability in a collection agency lawsuit can sometimes be complicated and may depend on the individual details of each arrangement. 

Do I Need a Lawyer?

Collection agency laws generally require the interpretation of a lawyer as they can vary by region. If you are facing any legal issues involving a collection agency, you may wish to speak with a lawyer immediately. A qualified attorney in your area can help represent you in a court of law, and may be able to assist you in obtaining a damages award in connection with the collections issue you’re facing.

Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 11-18-2014 03:19 PM PST

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