Enlisting the help of a collection agency to enforce a money judgment is a smart idea. Collection agencies can do a lot of things that are simply beyond the reach of judgment creditors attempting to collect in-house. But before choosing a collection agency, it is important to understand how that agency gets paid.
Payment models can have an impact on the amount of money a judgment creditor ultimately receives. According to Salt Lake City-based Judgment Collectors, the three payment models you generally find in the industry are:
- Consignment
- Purchase
- Hourly rates/flat fees
Each payment model brings something unique to the table. Let us take a look at them one at a time, with the understanding that a judgment creditor needs to choose the model that best suits his circumstances.
1. Consignment (most common)
The consignment model is the most common model among collection specialists. It is the model Judgment Collectors uses. In taking cases on consignment, the agency works on behalf of the judgment creditor as a legally recognized agent. Furthermore, the agency is only paid if and when it collects. Payment is generally based on a percentage of the amount collected.
The big advantage here is that the creditor risks very little. If nothing is collected, the agency doesn’t get paid. But there is more. The agency also covers its own costs. So once a case is turned over to the agency, the creditor spends no more time or money on collection efforts.
2. Purchase (less common)
The purchase model isn’t so much a payment option as it is a business transaction. Under this model, the collection agency doesn’t become an agent of the creditor. Instead, the agency actually purchases the judgment as an asset. Once the transaction is complete, the original creditor is out of the equation. The agency becomes the new creditor with full ownership over the debt.
Selling a judgment to a collection agency offers one big advantage: getting the matter over and done with quickly. A creditor will not have to face years of collection efforts and the stress that goes along with it. On the downside, collection agencies typically pay pennies on the dollar. They have to offer the lowest possible price in order to protect themselves.
They get paid by successfully collecting. The difference between what they collect and the purchase price they paid equals their profit. That profit needs to cover their costs and pay their people.
3. Hourly Rates and Flat Fees (the least common)
The least common payment model treats judgment collection like any other professional service. An agency using this model might charge a flat fee based on the total value of the judgment in question. On the other hand, the agency might charge hourly for the work it puts into the case.
Flat fee and hourly rate billing are usually reserved for cases involving exceptionally small judgment amounts. A small judgment would not be worth purchasing. From a consignment standpoint, charging a fee based on a percentage of the amount collected would not yield enough money to make the work worthwhile.
The best way for an agency to serve the creditor and still make a decent amount of money is to charge a flat fee or hourly rate. The creditor needs to decide whether he will ultimately pay more to the agency than he will actually collect.
Now you know how collection agencies get paid for enforcing judgments. If you ever find yourself needing the services of an agency, keep this in mind. The payment model could ultimately impact how much you receive through enforcement.