A collection cost is any cost associated with recovering debt on which the borrower has defaulted on his obligation to pay. Such items as the fees charged by collection agencies and attorneys, for example, are collection costs, as are the various costs involved in collecting the debt through the legal process. Other costs associated with borrowing, such as the cost of obtaining credit reports of potential borrowers, are related to the lending decision, not collection, and so are not collection costs. Likewise, the routine costs of collecting a debt that is in good standing — printing payment coupons or issuing receipts as payments are made, for example — are also not considered collection costs.
When a consumer borrows money, finances a purchase or applies for a line of credit, he usually signs an agreement to repay the money borrowed, with interest. Most such agreements include default provisions, outlining the steps the lender may take if the borrower doesn’t pay the debt as agreed. The default provision usually contains a clause that provides for the borrower to pay the collection cost — that is, all costs incurred by the lender in attempting to collect the unpaid debt.
As long as the borrower pays at least the minimum amount due, on time, the loan is considered to be in good standing. It generally takes a while before a creditor considers a loan to be in default — such issues as a single late payment don’t generally lead the creditor to declare the loan in default. Generally, though, if a borrower misses two consecutive payments, most creditors will declare the loan in default and trigger the collection process.
When lenders contract with outside collection agencies to collect a defaulted debt, the collection agencies keep track of the costs they incur in collecting the debt. The postage paid to mail a collection notice, for example, is one such collection cost, as is the cost of making calls to the borrower. In many cases, though, the collection agency will simply add a flat fee or a percentage of the debt to be collected rather than itemize expenses.
Another collection cost is attorney’s fees. If the collection agency is unsuccessful in collecting the debt, the original lender will refer the case to an attorney, who will continue collection efforts, using the threat of a lawsuit to persuade the borrower to pay. The attorney generally has the right to negotiate with the debtor, and the amount under negotiation is the total amount owed to the lender plus the collection costs added by the collection agency and the attorney. If the case goes to court, the amounts are less likely to be adjusted through negotiation. If the lender’s attorney wins the case, the debtor is ordered by the court to pay the amount due, which is generally the full amount owed to the lender, plus the attorney fees and court costs.
