What Is a Trust Account? How Collection Agencies Handle Client Funds

A collection agency recovers a payment from one of your customers. The debtor has paid, but the money has not reached you yet. You ask where it is, and the answer comes back: it's in our trust account.

If you have not dealt with trust accounts before, that sounds like another name for a bank account. The agency has the money, it is sitting somewhere for a while, and eventually it will be sent along. All of which is true, and none of which is the part that matters.

What is a trust account?

A trust account holds money on behalf of another party, kept separate from the organization's own operating funds.

The distinction it creates is between possession and ownership. An agency has its own money, which is revenue it has earned and cash it uses to pay staff, rent, and everything else involved in running the business. It may also be holding money that was collected for a client. Both may sit in accounts the agency controls, but only one is the agency's operating money.

A trust account is where that line gets drawn.

Why collection agencies use them

Most service businesses never hold their customer's money. A consultant invoices for work and gets paid. A software company charges a subscription and keeps it.

A collection agency is in a different position, because it can receive money that was owed to somebody else.

Say a business places a past-due account of $40,000 with a commercial collection agency, and the debtor eventually pays the agency rather than the creditor. For some period, that money has left the debtor and has not yet reached the client. The agency is holding it in between.

That creates a question the agency has to answer somehow. What should happen to client money while the agency has possession of it?

The trust account is the answer.

Following a collected payment

The structure is easiest to understand by tracing one payment through it.

1. The debtor pays. A payment arrives at the agency on an account a client placed. From that moment, the agency is holding funds associated with the client's receivable.
2. The payment is deposited and recorded. It has to be matched to the right debtor, the right account, and the right client. Depending on how the debtor paid, there may also be a clearing period before the recovery is treated as final, because a payment appearing in an account does not always mean it can no longer be returned or reversed.
3. The funds stay separate. Between collection and remittance, client money is held apart from the agency's operating cash. This is the part the phrase "it's in our trust account" is actually pointing at.
4. The recovery is reconciled. The agency determines how the payment should be treated under the collection agreement, which is where a contingency fee is calculated and the amount due to the client is established.
5. The client is remitted. Once the payment has cleared and been reconciled, the client's portion goes out on the agency's remittance schedule.

The trust account sits at a specific point in that sequence, between the debtor paying and the client receiving.

What the separation changes

Without a trust account, recovered client money would flow into the same pool of cash the agency uses to operate. That makes a basic question harder to answer than it should be. Of the money the agency is holding right now, how much is its own operating cash and how much is being held for clients?

Keeping client funds separate means collections and remittances can be accounted for independently of the agency's own expenses. It also means the answer to that question is available at any moment rather than reconstructed.

This is what the word trust is doing in the name. The agency has been entrusted with money for the period between recovery and remittance, and the account is the structure that recognizes those funds as different from ordinary operating cash.

Where the requirement comes from

The separation is not only an industry preference. Trust account requirements also appear in state collection agency licensing laws, written plainly enough that an applicant knows exactly what is expected. Washington's Department of Licensing tells applicants they must open a trust account at a federally insured bank for money collected on behalf of clients, and that the account must hold enough funds to cover all obligations to those clients. Tennessee requires the same by statute, verified through CPA-prepared financial statements or bank statements.

Nevada draws a connection worth noticing, setting a licensee's required bond according to the average monthly balance in its trust account. An agency holding more client money has to be bonded for more of it. Requirements vary, since some states license collection agencies and some do not, and for an agency working nationally the obligations can extend well beyond its home state depending on where collection activity takes place.

What stays consistent wherever the requirement appears is the underlying principle. Money collected on behalf of clients has to remain identifiable and accounted for separately from the agency's operating funds.

Washington's phrasing is worth noticing, because the account must contain enough to cover what is owed to clients. That is the same thing the certification audit checks, arriving from a completely different direction. A state regulator and an industry certification body, working independently, both land on the same test. Is the money actually there?

Does a trust account earn interest?

This is a fair question to ask. If an organization is holding meaningful amounts of client money, could it generate income simply by holding it?

The answer depends on the type of account, the agency's banking arrangement, and any standards or rules that apply to it. There is enough variation that it is worth asking an agency directly rather than assuming every trust account works the same way.

What does not vary is the purpose of the account. Client funds are held separately because they are not part of the agency's operating cash. An agency's compensation should be clear from the collection agreement, and whether a particular trust account earns interest, along with how any interest is handled, is a separate question the agency should be able to explain without difficulty.

Why certification bodies care about trust accounts

This is where the trust account stops being an internal bookkeeping choice.

The International Association of Commercial Collectors requires members in good standing to carry a minimum $50,000 bond and maintain a separate trust account for all client money. The Commercial Law League of America's Commercial Collection Agency Certification Program, which is endorsed by IACC, goes considerably further.

What makes it worth citing is how specifically the audit looks at the trust account. CLLA identifies CliftonLarsonAllen LLP as the firm performing its compliance audits, working under agreed-upon procedures in accordance with attestation standards set by the American Institute of Certified Public Accountants. An agency has to submit trust account records covering at least half its trust activity, and the auditor then:

• Traces the reconciled trust account bank statements to the agency's financial statements for a selected month
• Compares the reconciled balance in the trust accounts against the total trust liability the agency reported
• Pulls three debtor payments from the deposit listing and follows the supporting documentation through both the receipt and the remittance paid to the creditor

An agency can describe its controls however it likes. The audit puts those controls to a concrete test. Does the trust balance cover the obligation, and can actual debtor payments be traced through to client remittance?

Why would professional organizations build this much of a certification standard around a bank account?

Because recovering the debt is only half of what an agency does with a client's money. Once a payment is in hand, the agency becomes responsible for handling funds it collected for someone else. Collecting well and handling what you collect well are separate capabilities, and a client depends on both.

Membership and certification are not the same

IACC membership carries safeguards including the separate trust account and bond described above. Agency certification adds the independent audit on top of that, along with annual recertification. An agency can be a member without being certified.

Separately, certifications exist for individual collectors, and these are different from certification of an agency. An individual certification speaks to a collector's training and knowledge. Agency certification addresses the business and how it handles money. When the question is what happens to your funds, that difference matters.

CLLA publishes a list of certified agencies, which makes the claim checkable rather than something you have to take on faith.

What this means when you hear it

For most clients none of this is visible during an ordinary collection. An account gets placed, the agency works it, a payment comes in, and a remittance arrives some time later. The trust account operates in the middle, which is why the phrase passes so easily.

Once you know what the account is, though, that sentence carries more than it appears to.

It means the agency distinguishes between money it is holding for clients and money it uses to run itself. It means the period between collection and remittance has accounting controls attached to it. And in commercial collections, that distinction matters enough that IACC and CLLA build the handling of client funds into their membership and certification standards.

A trust account is not just where recovered money waits. It is part of the structure governing what happens to someone else's money while a collection agency has possession of it.

How this relates to JSD

JSD is a commercial collection agency based in Dover, Delaware, working accounts nationally and internationally. It has been an IACC Agency Member since 2000 and is a Sustaining Member, which can be confirmed in the IACC member directory. That membership carries the requirements described above, including maintaining a separate trust account for all client money and carrying a bond.

Recovered client funds are held in a separate trust account. JSD's clearing, reconciliation, contingent fee, and remittance procedures are covered separately in Payments and Remittances.