What the Law Says About Collection Fees and Interest Charges
Many consumers are under the mistaken impression that federal law prohibits a collection agency from demanding fees and interest charges from the debtor. This isn't always the case. Let's take a look at Section 808 of the Fair Debt Collection Practices Act, which details collection practices that are a violation of federal law:
"The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. "
We can see here that a collection agency cannot arbitrarily decide to charge you a random fee just to pad its profit margin. Nor can it have a policy of charging fees for the same ridiculous reasons that debt settlement companies do, such as charging a fee to set up or update your account information.
Collection Agencies and Interest Charges
We know that debt collectors cannot charge arbitrary fees, but that doesn't mean that they can't charge fees at all. A collection agency's right to tack on additional charges to your debt depends on the agreement you signed with the debt's original creditor.
If you're like most Americans, you probably don't read the fine print when you apply for a loan or credit card, or use financing to obtain goods and services. The fine print, however, almost always addresses how much – if anything – debt collectors can add to your debt.
Take credit cards for example. Credit card account agreements sometimes stipulate that interest will continue to accrue should the account fall into collections. This means, simply, that when you don't pay your credit card debt and the credit card company charges it off, the collection agency that receives the debt will pick up right where the credit card company left off – charging you interest.
|Credit cards often pass collection fees on to you.|
As illogical as it may seem (because, lets face it, if you couldn't pay the original debt, odds are there's no way you're going to be able to afford an even higher amount), this practice benefits both the creditor and the debt collector. If the creditor hired the collector on a contingency, the collection agency receives a percentage of the amount it collects. The higher the debt, the higher the amount the credit card company recovers and the higher the debt collector's profit. A higher debt also ensures that a debt collector can offer you a debt settlement without losing money.
General Debt Collection Fees
Collection agencies don't collect debt out of the goodness of their hearts. Quite the contrary. Creditors pay dearly for the service. Well....they used to. Recently more and more creditors are including provisions in their contracts with consumers stating that, should the debtor default, the debtor will be responsible for paying the total cost of collection. Just look at this snippet from Capital One's cardholder agreement:
"You must pay us all of our collection expenses, attorneys’
fees, and court costs unless the law does not allow us to
collect these amounts. "
By passing the debt on to the consumer, creditors can save money and further increase their profit margins. Unfortunately, this also means that you may end up owing a much higher debt to the collection agency than you did to the original creditor.
Bill Collectors Demanding the Wrong Amount
Improving Credit Scores After Collections