Debt collection accounting

How does accounting work at a debt collection agency?

Billing is a central component of the debt collection process. In addition to the collection of outstanding receivables, the debt collection company is also responsible for invoicing the costs incurred, which are usually borne by the debtor.

Once payment has been received, these amounts are documented and allocated to the respective receivables. The collection costs and any agreed commissions are then deducted from the amount collected.

The accounting statement includes a detailed breakdown of all items:

• Received payments: The total amount of payments made by the debtor.

• Less collection fees: Costs for the services of the debt collection agency.

• Any additional expenses: Extra costs like court fees or delivery fees.

• Net payout: The amount that will be paid to the creditor.

Payouts to the creditor usually happen monthly or according to individual agreements. It's important to carefully review the accounting statement to ensure all amounts are recorded accurately.

By working with a debt collection agency, creditors get professional support in recovering outstanding debts and receive a transparent accounting of the collected funds.

Why am I receiving less money from the debt collection agency?

It can be confusing when the amount you receive from the debt collection agency is less than expected. In most cases, this is due to VAT on collection fees, which the debt collection agency collects from the debtor in addition to the main claim. But why does VAT affect the payout?

VAT on collection fees

Debt collection agencies are legally required to charge 19% VAT on their services. However, this VAT cannot be passed on to the debtor. The debtor is only obligated to pay the net collection fees, as VAT is not considered a late payment penalty.

Why can't VAT be charged to the debtor?

VAT on collection fees cannot be charged to the debtor because, legally, it is not considered a default-related expense. This means the debtor is only responsible for covering the actual net costs, not the VAT applied to them.

Additionally, the Federal Fiscal Court ruled on March 6, 1990, that VAT cannot be charged to the debtor if the creditor is entitled to deduct input tax. However, the collection agency is still required to pay the VAT to the tax office, which it deducts from the payout amount.

Impact on the payout amount

Since VAT cannot be charged to the debtor, it is deducted from the creditor’s payout. This means:

• Received payment: The debtor pays the main claim plus the net collection fees.

• VAT deduction: The 19% VAT on the collection fees is deducted from the total amount.

• Payout to the creditor: You receive the remaining amount after VAT is deducted.

Example calculation:

• Main claim: €1,000

• Collection fee (net): €100

• Total payment by the debtor: €1,100 (main claim + net collection fee = €1,000 + €100)

• VAT deduction (19% on collection fee): €19 (19% of €100)

• Payout to you: €981 (main claim − VAT = €1,000 − €19)

VAT reimbursement from the tax office

The good news is that as a creditor, you can reclaim the VAT paid from the tax office. If you are subject to VAT, you can claim back the deducted VAT as part of your VAT return, which allows you to recover the full amount of your claim in the end.

What is a success-based commission in debt collection?

A success-based commission in debt collection is a fee that a debt collection agency earns when it successfully collects an outstanding debt. Instead of charging fixed fees, the agency works on a commission basis and receives a pre-agreed percentage of the amount collected.

This provides a low-risk way to recover outstanding debts. Additionally, success-based commissions allow creditors to use the services of a debt collection agency without high upfront costs, increasing the chances of successful collection.

How does the success-based commission work?

• Commission agreement: Before collection activities begin, an agreement is made between the creditor and the debt collection agency specifying the amount of the success-based commission.

• Collection of the claim: The debt collection agency works to collect the outstanding debt from the debtor.

• Payout to the creditor: After successful collection, the success-based commission is deducted from the collected amount, and the remaining amount is paid out to the creditor.

What to watch out for?

• Commission rate: Success-based commissions can vary depending on the debt collection agency. It’s important to carefully review the terms.

• Transparent contract terms: All agreements should be clear and understandable.

• Reputable agency: A reputable agency will openly inform you about its fee structure and comply with legal requirements.

When does the payout from the debt collection agency occur?

The payout from the debt collection agency usually happens after the debtor has fully settled the outstanding debt, and all payments have been recorded. However, the exact timing may vary depending on several factors.

Factors that affect the payout timing

• Debtor’s payment receipt: The agency can only begin processing after receiving the payment.

• Processing time: Recording and accounting for the payment takes some time.

• Contract agreements: Some contracts include fixed payout intervals, such as monthly or quarterly.

• Partial payments: In cases of installment payments, payouts often occur only after full payment is received or based on agreed thresholds.

Payout process

• Receipt of debtor payment: The debt collection agency receives the payment and confirms the receipt.

• Accounting and settlement: All costs, fees, and VAT are considered.

• Determination of payout amount: The remaining amount is calculated.

• Transfer to the creditor: The payout is made according to the agreed terms.

Thus, payouts occur once all relevant steps are completed. Understanding the process and terms can help you better estimate when to expect the payout.

What happens with partial payments from the debtor?

If a debtor makes partial payments instead of paying off the full amount, these payments are applied in a legally defined order. This means the debt collection agency first applies the payments to specific items before the creditor receives the remaining amount.

Order of allocation for partial payments

1. Costs and expenses: First, any collection fees and additional expenses (e.g., postage, investigation fees) are paid.

2. Default interest: Next, the default interest owed by the debtor is applied.

3. Main claim: Only then is the remaining amount applied to the creditor's original claim.

What does this mean for the creditor?

• Delayed payout of the main claim: Since partial payments are first applied to costs and interest, it often takes longer for the creditor to receive the main claim.

• Incomplete amounts: If the debtor makes small payments, the main claim may be paid out in installments over a longer period.

What happens with ongoing partial payments?

With an installment plan, the debt collection agency regularly records the partial payments and pays out to the creditor at specified intervals. The payout amount and timing depend on how much the debtor has paid and whether all costs and interest are covered.

How can I check my debt collection statement?

Checking the debt collection statement is important to ensure all items are accurately recorded and accounted for. A clear and detailed statement gives you, as the creditor, transparency over the collected amounts and deducted costs.

Steps to check the debt collection statement

1. Check payments received: Verify which payments have been received from the debtor and whether they match the amounts in the statement.

2. Review costs and fees: Collection fees and any expenses should be clearly listed. Make sure the agreed fees have been correctly deducted.

3. Check default interest: The default interest owed by the debtor should also be calculated correctly and reflected in the statement.

4. Verify success-based commission: If a success-based commission was agreed upon, it should be deducted according to the contract terms.

5. Note the VAT: The deducted VAT on the collection fees should be correctly listed, as you can reclaim it from the tax office.

What should be included in the statement?

• Payment summary: Detailed listing of the amounts received from the debtor.

• Cost and fee deductions: All cost items, such as collection fees, success-based commissions, and any additional expenses.

• Remaining payout amount: The amount paid to the creditor after all costs have been deducted.