Debt collection companies: a practical guide for creditors and debtors

Your customer has not paid its invoices for three months, your tenant is accumulating unpaid rent, or, conversely, a debt collection company is contacting you to claim a disputed debt. In these difficult situations, understanding the role and powers of debt collection companies becomes essential. This guide examines how they operate, their legal limits and your rights depending on whether you are a creditor or a debtor.

What is a debt collection company

A debt collection company is a commercial business dedicated to the amicable collection of debts on behalf of third parties. Unlike commissaires de justice (bailiffs), who hold the monopoly on enforcement of enforceable instruments, these companies act only in the amicable phase, before any contentious proceedings.

Legal status and registration

These businesses must comply with several administrative obligations. They are registered in the commercial and companies register (registre du commerce et des sociétés) like any commercial company, the declaration being filed with the single body responsible for business formalities (Articles L. 123-33 and R. 123-3 of the French Commercial Code).

Their main activity consists in negotiating payment arrangements, proposing instalment plans and exerting lawful commercial pressure on defaulting debtors. They act on the instructions of the original creditor, in return for a commission generally between 10 and 25% of the amount recovered.

Difference from other debt collection professionals

A debt collection company should be distinguished from a commissaire de justice. The commissaire de justice holds a statutory monopoly on the enforcement of court decisions and other enforceable instruments and may carry out attachments, evictions or service of documents. The debt collection company has no coercive power and can act only through persuasion and negotiation. The preconditions and conduct of the attachment of debts procedure (saisie-attribution) are detailed in our guide to this enforcement measure.

Lawyers may also carry out debt collection, but their involvement is generally limited to the contentious phases or to complex files requiring in-depth legal knowledge.

Legal framework for debt collection

Applicable regulations

The activity of amicable collection of debts on behalf of others is governed by Article L. 124-1 of the French Code of Civil Enforcement Procedure, which codified Law No. 91-650 of 9 July 1991 reforming civil enforcement procedures, and by Articles R. 124-1 to R. 124-7 of the same Code, arising from Decree No. 2012-783 of 30 May 2012. These texts apply to any person who carries out amicable collection on behalf of others, even occasionally or incidentally, unless doing so by virtue of a professional status.

These persons must show, by a written declaration delivered or sent before carrying on the activity to the public prosecutor (procureur de la République) at the judicial court (tribunal judiciaire) within whose jurisdiction they have their registered office, that they have taken out professional liability insurance and that they hold a bank account used exclusively for receiving funds collected on behalf of creditors (Article R. 124-2). The public prosecutor may at any time verify compliance with these obligations.

Conditions of practice

To practise lawfully, the debt collection company must, in addition to the declaration provided for in Article R. 124-2, enter into a written agreement with the creditor giving it authority to receive payment on the creditor's behalf. This agreement specifies in particular the basis and amount of the sums due, the terms of the liability guarantee, the terms for determining the remuneration payable by the creditor and the terms for paying over the funds collected (Article R. 124-3).

Funds received on behalf of the creditor are paid over to it, unless otherwise agreed, within one month of their actual receipt, and a receipt is given to the debtor for any payment (Article R. 124-6).

Sanctions for breach

Failure to make the declaration to the public prosecutor, absence of insurance or of a dedicated account, and omission of any of the mandatory statements in the letter sent to the debtor are punishable by the fine for fifth-class petty offences (Article R. 124-7). Unfair practices (harassment, threats, identity theft) may in addition give rise to prosecution under ordinary criminal offences and engage the civil liability of the person responsible.

Duties and powers of debt collection companies

Exclusively amicable collection

The debt collection company acts only in the amicable phase. Its task consists in contacting the debtor, analysing the debtor's financial situation and negotiating the most suitable terms of payment. This approach favours the search for a compromise acceptable to both parties.

It may propose payment instalment plans, partial write-offs of the debt in the event of immediate payment, or deferral of due dates depending on the debtor's temporary difficulties. This flexibility is often an advantage over more rigid court proceedings.

Limits on powers of intervention

Contrary to popular belief, the debt collection company has no power of compulsion. It cannot carry out attachments, block bank accounts or impose penalties other than those provided for by contract. Nor can it claim any official or public character.

Any attempt at intimidation by threatening measures that it cannot lawfully take is an unfair practice that may be penalised. The debtor should know that ignoring letters from a debt collection company exposes the debtor to no immediate sanction, unlike a payment order (commandement) served by a commissaire de justice under an enforceable instrument.

Collection and processing of information

In carrying out its task, the debt collection company may collect information on the debtor's situation, but in strict compliance with the General Data Protection Regulation (GDPR) and the French Data Protection Act. It may consult accessible professional databases, but cannot obtain confidential banking or tax information.

Rights and obligations of debtors

Right to information

Any debtor contacted by a debt collection company has fundamental rights. The company must identify itself clearly, state that it is acting on behalf of a third-party creditor, and give the exact particulars of the debt claimed (amount, origin, due date).

The debtor may require production of the documents supporting the debt: original contract, unpaid invoices, prior formal notice. Without these, the debtor may legitimately dispute the merits of the claim.

Protection against abusive practices

The law protects the debtor against harassment or intimidation. Repeated telephone calls, contact outside working hours, threats of non-existent proceedings and pressure exerted on family or professional contacts are prohibited.

Imagine a debtor receiving ten calls a day from the same debt collection company, or letters threatening seizure of real property when no court decision has been made. These practices are serious breaches giving rise to compensation. The means of protecting oneself against these threats and unlawful claims are developed in our article on debtors' rights in the face of abusive practices.

Right to dispute and negotiate

The debtor retains the right to dispute the existence or amount of the debt claimed. Amicable collection involves no measure of compulsion: failing agreement, the creditor must obtain an enforceable instrument. The debtor may also propose terms of payment suited to his or her financial situation.

Constructive negotiation often makes it possible to avoid taking the dispute to court, which is costly for both parties. A debtor acting in good faith who acknowledges the debt but is going through temporary difficulties generally finds a sympathetic hearing.

Obligations and responsibilities of creditors

Choice of debt collection company

A creditor who instructs a debt collection company remains responsible for its actions. The creditor must check that the chosen company has made the declaration provided for in Article R. 124-2 of the French Code of Civil Enforcement Procedure and offers sufficient professional safeguards.

This check is all the more necessary because the creditor may incur civil liability for the unfair practices of its agent. Case law accepts that a creditor who chooses a debt collection company with dubious methods may be required to make good the loss suffered by the debtor.

Supply of accurate information

The creditor must provide the debt collection company with complete and accurate information on the debt: precise amount, contractual origin, history of any part payments. Any omission or inaccuracy may compromise the effectiveness of the collection and expose the creditor to legitimate challenges.

The creditor must also inform the company of anything liable to affect the debt: collective insolvency proceedings against the debtor, a pending dispute, limitation. Failure to inform may engage the creditor's contractual liability towards the instructed company.

Monitoring and control of the action

The creditor retains a duty to supervise the action taken by the debt collection company. The creditor cannot shelter behind the mandate given in order to escape all liability if things go wrong. Regular checks on the methods used are required.

This vigilance involves setting clear limits in the mandate contract and reacting quickly where the debtor reports abusive practices. A prudent creditor requires regular reports on the progress of files.

Collection procedures and methods

Preliminary analysis phase

Before any action, the debt collection company analyses the debtor's situation and the nature of the debt. This phase includes verifying the information provided by the creditor, precisely identifying the debtor and assessing the debtor's ability to pay.

Research into the debtor's assets and business position may be carried out within legal limits. Professional databases, public information from the commercial register and lawful commercial intelligence are the authorised sources of information.

First contact

First contact is generally made by letter. The letter sent to the debtor must contain the statements provided for in Article R. 124-4 of the French Code of Civil Enforcement Procedure: the name and address of the company, an indication that it carries on an amicable collection activity, the name and address of the creditor, the basis and amount of the sum due as principal, interest and accessory sums, excluding costs which remain payable by the creditor, a request to pay and the methods of payment, and reproduction of the second and third paragraphs of Article L. 111-8 of the same Code.

The tone must remain professional and respectful, avoiding any aggressive or threatening wording. The aim is to open a constructive dialogue, not to intimidate the debtor. A reasonable time to reply must be allowed, generally fifteen days.

Negotiation and arrangement

If the debtor responds favourably, a negotiation phase begins to define the terms of payment. This negotiation may cover spreading payments, a partial write-off in cases of proven difficulty, or early payment in return for waiver of collection costs.

The debt collection company shows flexibility in this negotiation, its interest lying in obtaining actual payment rather than rigid application of the initial terms. A payment plan that is honoured is better than an unrecoverable debt.

Monitoring and reminders

If the negotiated agreements are not complied with, the company sends graduated reminders. These reminders must observe the same rules as first contacts: courtesy, respect for hours, no harassment. The frequency of reminders must not become excessive.

Monitoring also includes regularly informing the creditor of the progress of the file. Transparency and responsiveness are the guarantees of effective cooperation between the creditor and the instructed company.

Costs and remuneration of collection

Methods of billing

The remuneration of debt collection companies is generally set as a percentage of the amount recovered, ranging from 10 to 25% depending on the difficulty of the file and the amount at stake. This incentive system aligns the company's interests with those of the creditor.

Some companies also charge a fixed fee for standardised files, or a combination of fixed fee plus commission for complex files. The cost of registered letters and in-depth research may be billed separately.

Allocation of costs

The costs of collection undertaken without an enforceable instrument remain payable by the creditor, unless they relate to an act that the law requires the creditor to perform. Any stipulation to the contrary is deemed unwritten, unless the legislation provides otherwise (Article L. 111-8, paragraph 2, of the French Code of Civil Enforcement Procedure).

A creditor who shows that the steps taken to recover the debt were necessary may, however, ask the enforcement judge (juge de l'exécution) to leave all or part of these costs to be borne by a debtor acting in bad faith (Article L. 111-8, paragraph 3). Between businesses, a debtor who is late in paying is in addition automatically liable for a fixed indemnity for collection costs, the amount of which is set by decree, the creditor being able to claim additional compensation on justification (Article L. 441-10 of the French Commercial Code).

Cost optimisation

For the creditor, the choice of a debt collection company must include a cost-benefit calculation. A high commission may be justified for difficult or old debts, whereas recent debts of significant amount call for negotiation of the fees.

Quality of service takes precedence over price alone. An effective company that recovers 80% of debts for a 20% commission proves more profitable than a cheaper company recovering only 40% of the amounts due.

Alternatives to using a debt collection company

In-house collection

Before outsourcing collection, the creditor may attempt in-house collection. This approach is particularly suitable for businesses with a structured accounts department and ongoing commercial relations with their customers. The steps to be taken by the creditor itself before any proceedings are presented in our guide to the amicable collection of a debt.

In-house collection has the advantage of preserving the commercial relationship and tailoring the approach to the debtor's profile. A loyal customer going through temporary difficulties deserves different treatment from a repeat late payer.

Use of a commissaire de justice

For large debts, or where amicable collection fails, going directly to a commissaire de justice may be appropriate. The commissaire de justice can carry out amicable collection while being able to begin enforcement as soon as an enforceable instrument is obtained.

This solution has the advantage of a single approach and avoids breaks in the handling of the file. The commissaire de justice also has a natural authority that may encourage a quick amicable settlement.

Credit insurance and factoring

Upstream, businesses can secure their debts by credit insurance, which covers the risk of non-payment in return for an annual premium. The insurer then handles collection of the insured debts under its own procedures.

Factoring is another alternative: the business assigns its receivables to a factor, which handles collection and guarantees payment. This solution frees the business from managing unpaid invoices in return for a commission on the turnover handled.

Frequently asked questions

Can a debt collection company seize my property?

No, a debt collection company has no power of seizure. Only commissaires de justice may carry out attachments, and only on the basis of an enforceable instrument (in particular a judgment or a notarial deed bearing the enforcement formula). If a debt collection company threatens seizure without a prior court decision, this is an unfair practice that may be penalised.

Can I ignore letters from a debt collection company?

Legally, you may ignore these letters without risking an immediate sanction. However, this attitude may push the creditor to bring court proceedings. It is generally preferable to reply in order to assert your rights: disputing the debt, requesting supporting documents, or proposing an arrangement if the debt is well founded.

For how long can a company claim a debt from me?

Extinctive limitation applies to collection actions. For commercial debts between businesses, the period is five years. For ordinary-law debts, it is also five years from the day on which the creditor knew or should have known the facts enabling it to act (Article 2224 of the French Civil Code). An action by a professional for goods or services supplied to a consumer is, however, time-barred after two years (Article L. 218-2 of the French Consumer Code). After this period, the creditor can no longer demand payment through the courts, unless the debt has been acknowledged or an act interrupting limitation occurred before its expiry.

Can a business in difficulty use a debt collection company?

Yes, even a business subject to collective insolvency proceedings may instruct a debt collection company for its debts arising before the opening of the proceedings. However, effectiveness remains limited because the creditors of the debtor business will be subject to the collective discipline of the proceedings. It may be more worthwhile to optimise internal management of trade receivables.

Can collection costs be claimed from the debtor?

In amicable collection, the costs remain payable by the creditor; any stipulation to the contrary is deemed unwritten, unless the legislation provides otherwise (Article L. 111-8 of the French Code of Civil Enforcement Procedure). The enforcement judge may, however, leave these costs to be borne by a debtor acting in bad faith where the creditor shows that they were necessary, and the fixed indemnity for collection costs under Article L. 441-10 of the French Commercial Code is due between businesses. In judicial collection, Article 700 of the French Code of Civil Procedure allows the court to be asked to order the debtor to pay costs not included in the legal costs (dépens).

How can I check that a debt collection company is lawful?

Ask for proof of the written declaration sent to the public prosecutor under Article R. 124-2 of the French Code of Civil Enforcement Procedure, as well as of the professional liability insurance and the dedicated account. You can also check the registration in the commercial and companies register. Failure to make the declaration is punishable by the fine for fifth-class petty offences (Article R. 124-7).

What should I do in the event of abusive practices?

Document the breaches: record abusive calls, keep threatening letters, note inappropriate call times. Send the company a formal notice reminding it of its legal obligations. If the conduct persists, file a complaint with the public prosecutor and seek compensation for the loss suffered before the competent civil court.

Conclusion: making proper use of debt collection companies

Debt collection companies are an effective tool for managing unpaid debts, provided that the legal framework governing their activity is strictly respected. For creditors, they offer a flexible and economical alternative to court proceedings, particularly suited to debts of medium amount.

The success of a collection assignment depends on choosing a qualified company, supplying complete and accurate information, and regularly monitoring the methods used. Debtors, for their part, must know their rights in order to avoid abusive practices while taking a constructive attitude towards well-founded claims.

Before instructing a debt collection company, consider whether this step is worthwhile in view of the amount at stake, the age of the debt and your relations with the debtor. Legal assistance can prove valuable in optimising your collection strategy and protecting your interests in the long term.