Who Owns Your Debt?
When a customer fails to pay a bill in a timely manner, small business owners have several options to attempt to collect. If the debt is not too old, it might be possible to file a civil lawsuit to obtain a judgement. If you lack the time needed to pursue collections, the amount of the debt is too small to make court costs worthwhile, or the statute of limitations has passed, you might consider hiring a collection agency to collect for you or selling your bad accounts to a debt buyer.
Assigning a Debt
Assigning a debt means handing the debt over to a collection agency to collect on your behalf. The benefit to assigning debt is that it the collection agency takes only a portion of the total amount owed if the debt is successfully collected. Assigning a debt to a collection agency is most effective when done early on, while the debt is still within the statute of limitations in the state in which your customer is located.
Selling a Debt
Selling a debt to a debt buying company is often a last resort, used when other collection attempts have failed or when the statute of limitations on the debt is approaching or has passed. Debt buyers pay pennies on the dollar to purchase the debt. What they offer is all your business will receive for the debt, and any amount the debt buying company collects is its profit.
Collection agencies work on a contingency basis, meaning they charge a percentage of the amount they collect from bad debtors on your behalf. In business to business collections, the amount is usually around 25 percent. Consumer debt collections might carry rates as high as 40 percent. First-party collection agencies collect as if they work for your collections department, using your company name and letterhead. Third-party collection agencies and collection attorneys will collect under the collection agency's name.
Statute of Limitations
Each state has a statute of limitations on debt that governs how much time you have to file a lawsuit to collect money owed. If a judgment is won against your debtor, you might be able to initiate garnishments to recover the debt. Once the statute of limitation passes, however, the debt is considered time-barred. You can still attempt to collect on a time-barred debt, but you cannot file a civil claim against your debtor. Because of this, many businesses find selling the debt after it becomes time-barred is the most profitable option.