To send a bill to collections, confirm the debt is still legally collectible, pull together your documentation, send a final demand, pick a licensed collection agency, and sign an assignment agreement that hands the account over. Most businesses reach that point 60 to 120 days after the invoice went unpaid, once internal calls and past-due notices have gone nowhere. The mechanics are straightforward. The details are what protect your right to the money and keep you out of trouble if the debtor pushes back.
When to Make the Move
The most common mistake is waiting too long. Collection recovery rates drop as accounts age: a 90-day-past-due account recovers meaningfully less than a 60-day one, and once a debt crosses six months to a year, full recovery becomes unlikely. For most businesses, 60 to 90 days past the original due date is the practical window.
Going too early causes its own problems. Pulling the trigger a couple of weeks after an invoice goes unpaid can burn a customer who would have paid with one more phone call. If your invoices or dunning letters tell customers that accounts go to collections after a specific number of days, follow that policy on every account. Inconsistent enforcement invites disputes and plays badly if the dispute ends up in court.
Confirm the Debt Is Still Collectible
Before you transfer anything, check your state’s statute of limitations for the type of debt involved. Written contracts, oral agreements, promissory notes, and revolving credit accounts each carry different deadlines, and for credit card debt alone state limits range from three to ten years. The clock generally starts on either the date of the last payment or the date of the first missed payment, depending on the state.
Once that deadline passes, the debt is “time-barred.” Under federal rules, a collection agency cannot sue or threaten to sue on a time-barred debt, with a narrow exception for proofs of claim in bankruptcy.1eCFR. 12 CFR 1006.26 – Collection of Time-Barred Debts The debt doesn’t vanish, but your leverage shrinks sharply, and sending an aged debt to an agency without flagging its age can expose you to liability.
Watch for actions that restart the clock. A partial payment, a written promise to pay, or in some states even an acknowledgment of the debt resets the limitations period to zero. Pull your ledger and confirm the date of the last activity before you move. A few categories of debt carry no statute of limitations at all, including federal student loans, tax debts, and child support.
Build the File You’ll Hand Over
The strength of a collection effort tracks the quality of the paperwork behind it. A clean file lets the agency pursue the debtor and defend the claim if challenged. A thin file guarantees friction.
- The original agreement, whether that’s a signed contract, loan note, credit application, or service agreement. If the debt has changed hands, include proof of each assignment.
- Itemized invoices showing the goods or services, dates, and amounts. Lump-sum claims without detail are easy to challenge.
- A complete payment history: every payment received, each date, and the remaining balance.
- Contact information for the debtor, including full name, last known address, phone, email, and any identifying numbers like an SSN or EIN.
- A correspondence log with copies of every past-due notice, letter, and email, plus delivery confirmations. This shows you tried to resolve the matter directly.
Check your contract for language authorizing collection costs, late fees, or attorney fees on top of the balance. Without it, the agency can usually pursue only the original debt plus any interest your agreement or state law allows. Combine everything into a single digital packet before you reach out to an agency; it speeds up the transfer and cuts down on back-and-forth later.
Send a Final Demand Letter
No federal law requires a creditor to warn a debtor before assigning an account to a collection agency. The Fair Debt Collection Practices Act applies to third-party collectors, not to original creditors chasing their own debts.2Federal Trade Commission. Fair Debt Collection Practices Act Text Even so, a final demand is good practice.
A tight letter stating the full balance owed, giving a firm 15 to 30 day payment deadline, and telling the debtor the account will go to collections if unpaid often shakes loose a payment. The prospect of a collections tradeline on a credit report is real, and some debtors who ignored earlier notices respond to this one. Send it certified mail with return receipt so you can prove delivery if the debtor later claims surprise.
Even though the FDCPA doesn’t bind you directly, write the letter as if it did. State the balance accurately, don’t misrepresent the debt, and don’t threaten anything you don’t plan to do. State consumer protection laws can reach deceptive conduct by original creditors even where the federal statute does not.
Contingency Collection or Selling the Debt
Two paths lead the account off your books, and they work very differently.
Contingency Collection
You keep ownership of the debt and hire an agency to chase it on your behalf. The agency earns a percentage of whatever it collects and gets nothing if it recovers nothing. Commissions usually run 25% to 50% of recovered amounts, with smaller or older accounts commanding the higher rates because they take more effort relative to the payout. Larger, fresher accounts negotiate down. The agency reports back on contacts, settlement offers, and results.
Selling the Debt
A debt buyer purchases the account outright for a fraction of face value. Once sold, the buyer owns the debt and absorbs all further costs and recovery risk. You get immediate cash. You also get far less than a successful contingency effort would return, with fresh accounts typically selling for pennies on the dollar and older or specialized categories like medical debt selling for less.
For most small and mid-sized businesses handling a manageable set of delinquent accounts, contingency collection is the better fit. Debt sales make more sense when you have a large portfolio of aged receivables and want to clear the books in one move.
Vet the Agency Before You Sign
Hiring an agency that cuts corners creates liability for you, so take the vetting seriously. Most states require collection agencies to hold a license, post a surety bond, and renew annually. Licensing typically involves state filings, a certificate of good standing, and application and investigation fees, and many states run the process through the Nationwide Multistate Licensing System. Some states also require individual collectors to be registered separately.
Before you sign anything, confirm three things. First, the agency is licensed in every state where your debtors live, not just where the agency is headquartered. Second, it carries a surety bond that protects you if the agency mishandles money it collects on your behalf. Third, it can walk you through its compliance procedures under the FDCPA and the CFPB’s Regulation F, including how it handles validation notices, disputes, and cease-and-desist requests. Vague answers on compliance are a reason to keep looking.
Execute the Transfer
The handoff happens through a written assignment agreement. Read it closely. It should spell out the commission rate or fee structure, whether the agency can accept partial settlements or must pursue the full balance, how and when recovered funds are remitted to you, how disputes are handled, and how either side can terminate the arrangement if things go sideways.
Most agencies take submissions through a secure online portal. You upload the documentation packet; the agency reviews it, confirms the claim is viable, and issues a confirmation with an internal account number. Keep that confirmation on file.
From that point, stop collecting directly. If the debtor calls you, refer them to the agency. If a payment arrives at your door anyway, tell the agency right away so they can update the balance and avoid chasing money you’ve already received.
What the Agency Will Handle on Your Account
Once the agency is working the file, federal law dictates how it communicates with the debtor. Those rules bind the agency, not you, but failures on its side can still blow back on your account, so it helps to know what’s happening.
Within five days of first contacting the debtor, the agency must send a written validation notice stating the amount of the debt, the name of the creditor it’s owed to, and the debtor’s right to dispute the debt within 30 days. If the debtor disputes in writing during that window, the agency must pause collection until it sends verification or a copy of a judgment.3Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts Regulation F adds detail, including an itemization showing how the current balance builds from the original amount plus interest, fees, payments, and credits.4eCFR. 12 CFR 1006.34 – Notice for Validation of Debts When a debtor disputes, the agency comes back to you for the proof. The packet you handed over has to answer that fast.
The agency can also report the account to the major credit bureaus, but only after it has first contacted the debtor and allowed a reasonable period for any undelivered-notice response.5Consumer Financial Protection Bureau. When Can a Debt Collector Report My Debt to a Credit Reporting Agency Any party that reports to the bureaus must report accurately and correct errors it discovers.6Office of the Law Revision Counsel. 15 USC 1681s-2 – Responsibilities of Furnishers of Information to Consumer Reporting Agencies
A debtor can also send the agency a written cease-and-desist letter demanding that communication stop. Once received, the agency must comply, with narrow exceptions for notifying the debtor that collection efforts are ending or that a specific legal remedy like a lawsuit will be pursued.7Office of the Law Revision Counsel. 15 USC 1692c – Communication in Connection with Debt Collection The letter doesn’t erase the debt. The agency can still report it, and you or the agency can still sue. But a cease-and-desist usually signals that voluntary payment isn’t coming, and at that point the question becomes whether litigation is worth the cost.
If the Debtor Is on Active Duty
The Servicemembers Civil Relief Act layers extra restrictions on debts owed by active-duty servicemembers. For obligations incurred before active duty, interest is capped at 6%, and anything above that must be forgiven rather than deferred. The servicemember has to request the cap in writing and provide military orders or a commanding officer’s letter.8Consumer Financial Protection Bureau. Servicemembers Civil Relief Act (SCRA)
The SCRA also blocks repossession of vehicles or property without a court order, blocks foreclosure on pre-service mortgages during active duty and for a year afterward, requires courts to appoint counsel before entering a default judgment, and allows cases to be paused for 90 days or longer.8Consumer Financial Protection Bureau. Servicemembers Civil Relief Act (SCRA) Ignoring these protections carries real consequences. If there’s any chance a debtor is on active duty, verify status through the Department of Defense’s SCRA website before anything aggressive goes out.
If You End Up Writing It Off
When collection fails and you give up, the write-off has tax consequences. Accrual-method businesses can deduct a bad debt in the year it becomes worthless. The IRS wants to see that you took reasonable steps to collect and that there’s no realistic expectation of repayment left. A court judgment isn’t required, but you need to show that even a judgment would be uncollectible, and the deduction is available only in the year worthlessness is established.9Internal Revenue Service. Topic No. 453, Bad Debt Deduction
Cash-basis taxpayers have a harder road. You can deduct a bad debt only if you previously included the amount in gross income, and for a cash-basis business that invoiced work it never got paid for, the amount was never reported as income in the first place. Nothing to deduct.9Internal Revenue Service. Topic No. 453, Bad Debt Deduction
If you cancel or forgive $600 or more of a debt and you qualify as an applicable financial entity (banks, credit unions, federal agencies, and certain other lenders), you must file Form 1099-C with the IRS reporting the cancelled amount, and the debtor generally owes income tax on that amount unless an exclusion applies.10Internal Revenue Service. About Form 1099-C, Cancellation of Debt Even if the form isn’t required in your case, keep records of when and why you wrote the debt off; those records support the bad debt deduction if the IRS questions it.