What is a collection agency bond and how does it work?

What is a collection agency bond and how does it work?

What is a collection agency bond and how does it work?


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Collection agency bonds (also known as collection agency license bonds and debt collector bonds) are a type of surety bond legally required for a collection agency to engage in business. This specific type of surety bond guarantees that the collection agency that purchased the bond will comply with any fair and legal debt collection practices. 


Keep reading to better understand what collection agencies are, what a collection agency bond is, and how collection agency bonds work. 

What is a collection agency?

To understand the purpose of a collection agency bond, it helps to know what a collection agency is. A collection agency is a company that lenders and creditors work with to help them recover any funds they lent to a borrower that are past due or in default. In some cases, debt collection agencies are hired to try to recover these funds on behalf of the lender or creditor. In other cases, the lender or creditor actually sells the debt at a loss to the debt collection agency and then the collection agency tries to profit by recovering the full amount owed from the borrower. 

What are collection agency bonds?

A collection agency bond is a surety bond that all debt collection agencies must possess in order to engage in the business of collections. Collection agency bonds ensure that the collection agency who took out the bond will comply with all legal debt collection practices which helps protect consumers against the predatory practices that were more common in the debt collection industry before regulations were in place.


Collection agency bonds are made up of three different participants:


    • The principal. This is the debt collection agency that purchases the collection agency bond.

      • The surety company. The company who provides the surety bond coverage.

        • The obligee. The entity requiring the surety bond (this is usually a government agency). 

        Are collection agency bond amounts the same in each state?

        How much a collection agency bond amount must be depends on the state the debt collection agency is licensed in. The costs and requirements for the collection agency bond can also vary on a state level. 


        Let’s look at two examples of how bond amounts and who requires the bond can differ by state. 


          • Arizona. Arizona collection agency bonds are required by Arizona's Department of Commerce and the collection agency bond is set at $10,000. 

            • Idaho. Idaho collection agency bonds are required by Idaho's Department of Finance and the collection agency bond amount is set at $2,000. 

            What is the bond claim process like?

            So, what happens if a consumer processes a bond claim against a debt collection agency? A claim would occur if a consumer raises a complaint that a debt collection agency didn’t fulfill the duty of their license. The claim amount can’t be for more than the total amount of the collection agency bond. 


            These are a few examples of why a consumer may make a complaint and process a bond claim against a bonded debt collection agency:


              • Fraud

                • Theft

                  • Discrimination

                    • Overcharging customers

                      • Misuse of customer money

                        • Maintaining fees for the benefit of the agency


                        Once a claim is filed against a collection agency bond, the surety company expects the principal to deal with the claim. If the debt collection agency fails to take care of the claim, the surety will launch an investigation to determine the claim’s validity. Once this investigation starts, the surety company will investigate the claim and either find it to be valid or invalid. If the claim is invalid, for the most part no further action will be taken (although in some cases the principal is liable for costs incurred by the surety during the investigation process). 


                        If the surety company determines that the claim is valid, they will remind the principal of their obligations under the bond and ask them to settle the claim. Typically, settling the claim involves compensating the claimant for any financial loss or damages incurred. Once the claim is fulfilled, the claim process comes to an end. If the debt collection agency fails to fulfill the claim, the surety company will have to pay the claim. The surety company will then pursue reimbursement for that claim settlement, as well as any legal costs, through the principal. 

                        How much will a collection agency bond cost?

                        The cost of collection agency bonds depends on the overall bond amount and the surety company you choose to purchase the bond from. That being said, generally collection agency bonds are fairly inexpensive, although the higher the bond amount is, the higher the premium cost will be for the debt collection agency. 


                        To learn more about what a Surety Bond can cost in your state, click here!

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