I wanted to understand how companies decide to send accounts of customers to collections and then, how the collection agencies settle.
My understanding was that in any company, that has receivables, will have:
i. the internal accounting department contact the customer for payment of their outstanding account balance(s)
ii. there could be some "wiggle room" for the customer to get a discount on the above outstanding account balance(s) as the internal accounting department will try to settle the payment without sending it to collections
iii. only when the customer fails to pay atleast 30 - 50% of their outstanding account balance(s) will the internal accounting department send accounts of such customers to collections
My understanding of the concept of collections in this case is: the internal accounting department literally sells off the debt at a discounted price (typically 30 - 50% of the face value) to the collections agency.
It then becomes the job of the collections agency to recover any money from the debt.
Can the company, that sold off the debt to the the collections agency, claim the face value as a loss and write it off completely? (Or do they only get to claim the 70 - 50% of the face value as a loss and write it off)
Why would a company want to send to an account to collections without trying to contact the customer for payment of their outstanding account balance(s) at all?
Why would a collections agency not take the money offered to them by the customer and report a customer to the credit bureaus instead when the customer was willing to pay them 50% of the face value? Isn't that a loss to the collections agency?
There are two stories for background that lead me to ask these questions (feel free to skip over these, but would give some context):
I am helping out a freshman international student who just arrived in the U.S. last Fall. A few days after his arrival, he fell sick and went to the nearest hospital.
After his recovery, he got a bill from the hospital for around $4000. The international student health insurance that he bought refused to cover any of it as the T&C mentions that he has to visit his on-campus medical center first in such non-emergency cases.
He appealed to the insurance company noting that the nearest hospital was within walking distance and visiting the on-campus medical center would have required him to drive, for which he had no license yet.
This went back and forth for 2 months and the insurance company agreed to pay 40%.
When this student sends the check to the hospital, he gets a notice a few weeks later notifying that he has been sent to collections already!
The only communication from the hospital since they handed him the bill had been a courtesy call asking him whether he would like to pay the bill by credit card, check or draft. There was never any talk of late payment or a warning that it would be sent to collections.
Last day, on contacting the collections agency, they are asking for 140% of the bill amount, tacking on the additional 40% as various fees.
I personally contacted them on the students behalf, offered to pay them upto 70% of the bill amount and these guys are unflinching. It's either what they want or they will trash the credit report!
Hence, my question #3
I was involved in an incident with a rental car agency where the agency charged an obscene amount of money for a very minor repair (How would a collection against me affect my credit).
After some research, I found out that a resonable repair would typically cost $300 instead of the $1600 they billed.
I offered $600 to the rental car agency, they agreed to settle for $950.
I was confident that they would be willing to settle for ~30% of the original $1600, and was thinking of pushing this down further to $600
However, after the incident last day, I am not so confident, and am really afraid this might not end well and I might be reported to a collections agency without me knowing or in the loop!
Hence, my questions #1-3
In the end, what I am trying to figure out is how paying off debt through collection agencies would affect my credit report, provided I reach a full settlement agreement with them.