Collection Agency Bonds

Many industries require surety bonds in varying forms. In general, surety bonds involve three parties the principal — the person who purchases the bond, the obligee — the person who requires the bond, and the surety — the company who issues the bond

A collection agency bond works like many other surety bonds—it ensures that an agency fulfills its contract in an ethical manner. This bond compels the agency to properly handle money it receives while pursuing outstanding debts. It also guarantees those funds are routed to the company with the debt outstanding (less any agreed-upon collection fees, which can total as much as 30%).

If the collection agency misappropriates these funds, the obligee can file a claim on the agency's bond. If the claim is determined to be a valid one, the face value of the bond is released by the surety and paid by the collection agency.

Protection

Surety bonds serve several purposes in today's business world, such as protecting consumers against fraud, shielding the government and other industry members from unethical, illegal behavior, and increasing consumer confidence by providing a guarantee that contracts will be completed according to agreed-upon terms.

While many surety bonds protect consumers from illegal behavior, the state or local government is usually the recipient of bond funding should there be a claim, not an individual consumer. Consumer protection comes in the form of a deterrent—the bonded company neither wants the financial expense nor the stigma associated with a claim on its bond.

Rules & Regulations

Collection agency bonds are required by the state in which the agency operates. These bonds are usually around $5,000. The state also collects a small processing fee to process the bond and put the it on record. Collection agency bonds are relatively inexpensive due to the low face value.

The bond company needs to verify that the agency has the funds and the financial strength to be able to pay the bond in full should a claim be filed against it, so obtaining a bond requires an application, a credit check, and an in-depth examination of the collection agency's financial records.

While no one wants to have contact with a collection agency, the collection agency bond does increase the likelihood that the agency will adhere to state and local regulations regarding debt collection. The bond is important to both the party holding the debt and the party owing the debt since both want to ensure any monies involved in the transaction are handled and transferred appropriately.