What is a collection rate, or collection percentage?

Almost, without exception, all rental debt is collected on a contingency percentage, also known as a collection rate, or collection percentage.  You pay nothing if no money is collected.  If an agency is successful in collecting money, the agency’s fee is a percentage of the amount collected.  If a collection agency rate is 40% and they collect $100, you get $60 and the agency gets $40.

What are common collection agency rates?

Rates vary significantly.  Rates range from 20% to 60%.  However, collection rates are like anything else in life.  You get what you pay for.  Most established national agencies have collection rates that are 40 % or higher.  If a collection agency has two piles of debt, one that they get paid 20% on, and one where they get paid 40% or 50%, which pile of debt do you think will get the most effort?  Low introductory rates often are misleading because you never get the benefit of the low rate.  For example, some agencies offer a low rate up front (20% for money collected in the first 30 days) and then go to 40% or higher.  Because collection agencies are legally required to give debtors thirty (30) days to dispute a debt, typically not much money is collected in the first month.

What does liquidation rate mean?

The liquidation rate is a percentage determined by dividing the total amount collected by the total amount placed for collection.  If you place $100,000 for collection, and $15,000 is collected, the liquidation rate is 15%.  Liquidation rates vary significantly among collection agencies, and are driven by many factors, including resident demographics.  Liquidation rates for rental debt of 5% or less are below average, 5% to 10% are average, and 10% to 15% percent are above average.  Liquidation rates for rental debt above 20% are outstanding.  You’ll never know your true liquidation rate if you’re not getting enough information from your agency to accurately determine liquidation rates, and if you don’t take the time to really drill into and evaluate the information.

What is more important the collection percentage, or the liquidation rate?

Most people think that the collection percentage is the most important factor in collections, and believe they have received a great deal when they get a collection agency to agree to 20% or 30%.  However, it’s the liquidation rate that is the most significant factor in determining how much money you receive.  Assume $100,000 is placed for collection.  If your collection rate is 20%, but an agency only collects 5%, then you receive $4000 (80% of $5,000).  If your collection rate is 50% (2.5x higher than the 20% rate), but 15% is collected, you receive $7500 (50% of $15,000), or 87.5% more money in your pocket even though the collection rate was 30% higher.