To send an unpaid invoice to collections, you pick a licensed agency that handles your type of debt, sign a service agreement setting the contingency rate, and hand over a documented file: the contract, the invoice, the debtor’s contact information, your communication history, and a final demand letter. The agency then contacts the debtor on your behalf and remits what it recovers, minus its fee. Most businesses take this step after 60 to 90 days of unsuccessful in-house collection, because recovery rates drop sharply the longer an invoice sits.
When an Invoice Is Ready for Collections
Direct contact comes first. A reminder email, a phone call, a firmer follow-up letter. Most businesses run through that internal cycle over 30 to 60 days. If the debtor has gone silent or keeps promising without paying, you’re near the point where a third-party agency makes sense.
The working rule is 90 days past due. By then your own efforts have usually run their course, and the odds of collecting without help drop off. Waiting much longer works against you. Each state sets its own statute of limitations on written-contract debts, and those windows run anywhere from three to ten years. Once a debt passes that line, a collector cannot sue to recover it, and federal regulation prohibits collection agencies from filing or threatening to file suit on a time-barred debt.1eCFR. 12 CFR 1006.26 – Collection of Time-Barred Debts You don’t need to panic in the first year, but invoices left in a drawer lose value fast.
Choosing the Right Kind of Agency
Collection agencies are not interchangeable. The single biggest decision is whether your debtor is a business or a consumer.
Commercial or Consumer
If another business owes you money, you want a commercial collection agency. If an individual owes you for something they bought for personal, family, or household use, you want a consumer agency. The Fair Debt Collection Practices Act applies only to those consumer debts and does not cover business-to-business debts at all.2Office of the Law Revision Counsel. 15 USC 1692 – Congressional Findings and Declaration of Purpose Commercial agencies operate with more flexibility in their negotiation tactics; consumer agencies work under strict federal rules on how, when, and how often they can contact a debtor.
One thing to understand about that handoff: the FDCPA’s definition of “debt collector” excludes the original creditor collecting its own debts.3Office of the Law Revision Counsel. 15 USC 1692a – Definitions Once you hand the account to an outside agency, that agency becomes the regulated party, and an FDCPA violation exposes it to actual damages plus up to $1,000 in statutory damages and attorney’s fees.4Federal Trade Commission. Fair Debt Collection Practices Act Choose an agency with a clean compliance record. Otherwise your collection effort can turn into a counterclaim.
License and Vetting Checks
Most states require collection agencies to hold a license or bond to operate within their borders. Verify the agency’s license in the states where your debtors live, not just where the agency has an office. Ask for proof of errors-and-omissions insurance. Check complaint records with the Consumer Financial Protection Bureau and the Better Business Bureau. An agency that cuts corners on licensing tends to cut corners on compliance, and the fallout lands on you.
What to Gather Before You Place the Account
The strength of a collection effort tracks the paperwork behind it. A clean file gives the agency leverage; a thin one gives the debtor room to dispute and stall. Pull the following together before you contact an agency:
- The original contract or service agreement establishing payment terms, due dates, interest, and late-fee provisions.
- A copy of the unpaid invoice showing line items, the original due date, and the total owed. If the balance includes interest or late fees, break those out from the principal.
- Debtor identification: full legal name, last known address, phone, email. For consumer debts, a Social Security number helps the agency locate the debtor and report to credit bureaus. For business debts, include the Tax Identification Number.
- Communication history: emails, letters, texts, and notes from calls. This shows you made a good-faith effort before escalating.
- A final demand letter sent to the debtor stating that the account will be placed with a collection agency if unpaid by a specific date. Keep a copy and proof of delivery.
Most agencies provide an intake form to standardize what they receive. You’ll enter the debtor’s details, the principal balance, interest and fees, and a summary of your collection history. Accuracy matters here. Once the agency sends its validation notice, the debtor has the right to dispute the debt, and any inconsistency between your intake numbers and your documents gives them an opening.
Under Regulation F, the agency must send a written validation notice with its first communication to a consumer debtor, or within five days after.5eCFR. 12 CFR 1006.34 – Notice for Validation of Debts If the debtor disputes the debt in writing within 30 days, the agency must stop collection until it sends verification or a copy of any judgment.6Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts The cleaner your file, the faster the agency can answer a dispute and get back to collecting.
How the Fees Work
Most collection agencies charge on contingency. You pay nothing up front, and the agency keeps a percentage of whatever it recovers. Collect nothing, owe nothing. That alignment is why contingency pricing dominates the industry.
The percentage varies with the age and size of the debt. Newer accounts carry lower rates; older accounts cost more because they’re harder to collect. Larger balances tend to command lower rates because the dollar recovery is higher even at a smaller percentage. Rough ranges:
- Debts under 90 days old: roughly 15% to 25%.
- Debts 90 to 180 days old: roughly 25% to 30%.
- Debts over 180 days old: roughly 30% to 40%.
- Debts over one year old: up to 50%.
Some agencies offer flat-fee arrangements, typically $10 to $50 per account regardless of outcome. Flat fees show up more often for high-volume, low-dollar accounts or early-stage “demand letter only” services. Be careful with the flat-fee model, because the agency gets paid whether it collects or not, which weakens the incentive to work difficult files.
If you place a lot of accounts each month, ask about volume pricing. Businesses with steady collection needs can often negotiate 5 to 10 percentage points off the standard contingency rate.
Placing the Account
The actual transfer happens through a formal submission that gives the agency legal authority to contact the debtor for you. Most agencies run a secure online portal where you upload the documentation, complete the intake form, and sign the service agreement digitally. If you prefer paper, a placement package by certified mail with return receipt gives you proof of delivery.
Read the service agreement carefully before signing. Sometimes called a Master Service Agreement, it should spell out the fee structure, what happens if the agency recommends legal action, who pays court costs, how long the agency will work the account before returning it, and how recovered funds are remitted to you. Once both sides sign and your documents are uploaded, the agency begins its outreach.
What Happens After the Handoff
The agency assigns a tracking number, sends the debtor the validation notice, and works through a cycle of calls, letters, and negotiations aimed at payment or a settlement.
You’ll get periodic updates, usually monthly remittance reports showing payments collected, fees deducted, and the remaining balance. Stay engaged. If the agency negotiates a settlement below the full balance, you’ll need to approve it. If early efforts fail, the agency may recommend legal action, which usually means hiring an attorney to file suit in the debtor’s jurisdiction. That adds filing fees, process server fees, and attorney charges, all of which you weigh against the likelihood of recovery.
The account closes one of three ways: paid in full, settled, or returned to you as uncollectible. Uncollectible doesn’t always mean gone. It means the agency exhausted its methods. You can still take the debt to small claims court or write it off on your taxes.
Credit Reporting and Privacy Obligations You Carry Into the Handoff
When a consumer debt goes to collections, the agency can report it to the major credit bureaus, and that entry can stay on the debtor’s credit report for up to seven years. The seven-year clock starts 180 days after the delinquency that led to placement, not from the date the agency received the account.7Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports
If you or your agency report the debt, the Fair Credit Reporting Act imposes accuracy obligations. You must have reasonable policies for ensuring the information you furnish is accurate, investigate disputes from credit bureaus or directly from consumers, and correct or delete anything that can’t be verified.8National Credit Union Administration. Fair Credit Reporting Act (Regulation V) The delinquency date and balance the agency reports must match your records. Credit reporting works differently for commercial debts. Business credit reports operate under separate rules and are not governed by the FCRA, so credit reporting is primarily a lever for consumer collections.
Handing debtor information to a third party also triggers privacy rules if you qualify as a financial institution under the Gramm-Leach-Bliley Act. The GLB privacy rule generally requires notice and an opt-out opportunity before sharing nonpublic personal information with a nonaffiliated third party. There’s an exception when the collection agency acts as your service provider, but you need a written contract prohibiting the agency from using the debtor’s information for any purpose other than collecting the debt.9Federal Trade Commission. How To Comply with the Privacy of Consumer Financial Information Rule of the Gramm-Leach-Bliley Act Most agency service agreements include this clause. Verify it’s there before you sign. Even businesses outside the GLB Act should transmit debtor records through encrypted channels and keep Social Security numbers out of unencrypted email.
When Collections Isn’t the Right Move
For smaller invoices, the contingency fee eats most of the recovery. Filing in small claims court yourself can be more cost-effective when you have a strong paper trail and a debtor who simply won’t pay. Filing fees generally run somewhere between $15 and $300 depending on the amount claimed, and most small claims courts handle disputes up to $5,000 to $15,000 without an attorney.
Other paths worth weighing first:
- A written installment agreement, if the debtor acknowledges the debt but can’t pay in full. Money keeps flowing and you avoid agency fees.
- Mediation, when the debtor is refusing to pay because they claim dissatisfaction with the work.
- An attorney demand letter, which sometimes jolts a debtor into paying without the ongoing cost of an agency. Many attorneys charge a flat fee for one.
- Factoring or debt sale, where you sell the invoice to a third party at a steep discount for immediate cash and certainty.
Collections works best when the debt is large enough to justify the agency’s cut, the debtor has stopped responding, and the lighter-touch options have already failed.