Legal Definitions - costs of collection

Costs of collection refers to the various expenses an individual or organization incurs when actively pursuing payment for a debt, an overdue bill, or a defaulted financial obligation. These are the direct financial outlays made in an effort to recover money or assets that are owed.

• Example 1: Overdue Business Invoice

  Imagine a small marketing agency that completes a project for a client, but the client fails to pay the final invoice of $10,000 by the due date. After several polite reminders go unanswered, the agency decides to take more assertive steps. They might send a formal demand letter via certified mail, incur fees for a debt collection agency to contact the client, or eventually hire an attorney to file a lawsuit. The expenses for the certified mail, the collection agency's percentage, and any legal fees (such as court filing fees or the attorney's hourly rate) are all considered costs of collection because they are directly incurred in the effort to recover the $10,000 owed.

• Example 2: Unpaid Rent and Damages

  Consider a landlord whose tenant moved out without paying the last two months' rent and left significant damage to the property. The landlord attempts to contact the former tenant multiple times but receives no response. To recover the money, the landlord might pay for a skip tracer service to locate the tenant's new address, incur court filing fees to initiate a small claims case, and pay a process server to officially deliver the legal documents to the tenant. If the landlord hires a lawyer to represent them in court, those attorney's fees would also be included. All these expenditures are costs of collection because they are necessary steps taken by the landlord to recover the unpaid rent and repair costs from the former tenant.

• Example 3: Defaulted Loan Recovery

  A bank provides a loan to a company for the purchase of a specialized piece of machinery. When the company defaults on the loan, the bank needs to recover its money. The loan agreement allows the bank to repossess the machinery. The expenses the bank incurs for hiring a repossession agent, transporting the machinery, storing it, and having it appraised before sale are all costs of collection. If the sale of the machinery doesn't cover the full loan amount, and the bank pursues a lawsuit to recover the remaining balance, any associated legal fees and court costs would also fall under this category, as they are all part of the bank's effort to collect the outstanding debt.