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If you run any type of business, chances are high that you will have to deal with unpaid debts at some point, from a private customer, another business, a tenant, or any other entity you bill for products or services. Your choices when this happens include attempting to collect the debt yourself, selling it, hiring a collection agency, and even filing a civil suit (when the amount owed is high enough).
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Collecting Unpaid Debts Yourself
Most financial experts agree that the smarter move is attempting to collect the debt yourself, at least in the beginning. Collection agencies are experts in the field and use a variety of tactics to get debtors to pay up, but they charge for their services. Fees average between 25 and 33 percent of the entire amount of the debt, meaning, at most, you receive $75 for every $100 owed. Your best bet is giving yourself at least two to three months to collect the debt yourself.
If collecting the full amount is more important to you than collecting it quickly, working out a payment plan with your debtor increases the odds of receiving full payment. In fact, odds are high that any agency you hire would offer the account a payment plan, so hitting that option first yourself at least saves you that 25 percent fee.
Assigning Debt versus Selling It
If you hire a third party collection agency, your choices are assigning and selling the debt. Of the two options, assigning gets you the most money back (by a wide margin). These agencies are the traditional collection agencies. They either charge a flat fee or work on contingency, charging a percentage of the debt amount. That percentage typically varies by the age of the debt, with younger bills carrying a smaller contingency fee because they are more likely to pay. You pay flat fees up front, whether or not the agency collects on the debt. This is usually less expensive but, again, they may not be successful. Contingency plans only charge you upon collection of the debt.
Selling debt should be your last resort, only done when the statute of limitations is either approaching or already passed. The company buying your debt pays only pennies on the dollar, literally. You'll be lucky to get $10 for every $100 owed. Of course, if the statute of limitations is up, even that $10 may look good.
Choosing the Right Collections Agency
If you choose to hire a collections agency, remember that this third party reflects on your brand. Hiring a reputable agency helps protect your reputation; protect it by performing your due diligence by answering the following five questions.
- 1. Does the agency specialize in your industry? Some collection agencies specialize in a particular type of debt, meaning they have advanced knowledge of the intricacies involved in collecting for a particular industry.
- 2. Is the agency certified? Certification by the Commercial Law League of America means that the agency meets the CLLA guidelines and is compliant with a variety of state and federal laws. Check the CLLA website to make sure the agency is certified.
- 3. Is the agency licensed in your state? Most states require collection agencies to be licensed within that state. If your debtors are scattered across the country, you may want to look for an agency licensed in all 50 states. Check ACA International for state licensing and bonding requirements.
- 4. What are the agency's collection tactics? Remember, the collection agency represents you. Whatever its methods, some people will assume those methods are yours. Choose a company whose collection tactics match your values.
- 5. How will the agency keep you informed? During the negotiation phase, ask the agency how it communicates progress and determine whether those methods suit your preferences. If not, ask the agency if it makes exceptions or will assign you a dedicated contact.
Once you discover a number of agencies that meet your basic requirements (licensing, etc.), look further into each company's background, including talking to former and current clients to get an idea of the company's reputation and its ability at collecting debts.
Hopefully, you find at least three who meet your criteria so that you can request quotes and compare rates and company details. Do not be afraid to negotiate rates; most collections agencies are willing to negotiate. Compare rates from a variety of companies to ensure you receive the best quote possible and get to keep the highest percentage of monies owed to you.