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What Is a Collection Fee?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 01 November 2016
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A collection fee compensates an agent for collecting a debt or premium from a customer. It is usually based on a percentage of the overall funds collected. These are used by debt collection agencies to cover the expense of processing and handling debts, and may be part of the compensation structure at insurance companies. Any collection fees must be disclosed on financial paperwork for the benefit of customers.

In the case of debt collection, a company can either collect debts directly or assign them to a third party. The costs of collecting a debt can include tracing a customer, making contact, setting up a payment plan, as well as taking other steps. In some regions, customers may be responsible for collection fees; if, for example, someone writes a bad check to pay the phone bill, the phone company can recover not just the amount of the bill but any related check penalties and a flat collection fee for the expenses associated with resolving the situation.

Collection agencies must disclose their collection fee schedules to clients. If debtors are liable for the fee, this information must also be provided to them, so they understand how much they owe in terms of principal, interest, and fees. Earnings from fees are used to fund operations at the debt collection agency, including paying staff, maintaining equipment, and so forth. They also generate a profit, making collection of debts a paying endeavor for the firm.

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This term also comes up in the insurance industry, where it is used slightly differently. Some insurance agents receive commission payments, based on setting up new accounts, selling additional products, and so forth. Others may make a collection fee, which is based on their ability to collect premiums from customers. This is very common in life insurance in particular. Insurance agencies provide information about compensation and how pay is calculated as part of the employment contract.

Disputes over fees may arise in some cases. People may argue that they have been assessed too high or low, depending on the situation, and can request an adjustment. In a review, an analyst will examine the situation, look at the contractual terms and conditions, and determine if the collection fee is fair. Bills sent to collection in violation of a company’s terms may be grounds for suits to waive the fees in court and request compensation if a collection action resulted in losses or harm to the debtor’s reputation.

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