Chargebacks, Chargeback Recovery

Sending Chargebacks to Debt Collection

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We always advise merchants to fight chargebacks that are based on false premises, but it’s fair for merchants to ask just how far they should take that fight. The chargeback process can escalate up to arbitration from the card network, and that’s the final word on the chargeback—but disputes can and do carry on.

Lawsuits have been filed over chargebacks, and some merchants opt to fight chargebacks by sending debt collectors to go after cyber-shoplifters and other friendly fraudsters. Is it a good idea for merchants to use debt collection services to recover revenue lost to fraudulent or otherwise illegitimate chargebacks?

New call-to-actionChargebacks are part of a formalized dispute process laid out in the Fair Credit Billing Act of 1974. This law was designed to protect consumers from credit card thieves, shady merchants, and predatory banks, and it grants them the right to dispute transactions and get their funds back under certain conditions. The credit card networks interpreted the conditions spelled out in the law and created the many reason codes that apply to all the various chargeback scenarios.

When a merchant receives an invalid chargeback, they can fight it by representing the charge along with the evidence that proves the transaction was carried out properly. Past this point, if neither party accepts the outcome the case may go to arbitration by the credit card network.

The card network’s final decision cannot be appealed, but it doesn’t mean that the money under dispute is or is not owed to the merchant. An illegitimate chargeback can still be upheld if the merchant doesn’t have the right evidence to present, and sometimes a chargeback may be valid under the law even though the merchant might still have a legal and moral claim to the money. The Fair Credit Billing Act is only concerned about how card payments are carried out, not the underlying question of which party is right or wrong.

When a customer disputes a transaction and gets a chargeback, the merchant is free to consider the reversed payment an outstanding debt and treat it as such. In some cases, this leads to merchants contracting with debt collection agencies.

How Can Merchants Use Debt Collectors to Recover Chargebacks?

A chargeback is just a reversal of a particular kind of payment—a successful chargeback does not mean that the cardholder’s debt is erased. If the merchant believes that the cardholder still owes the transaction amount after a chargeback goes through, they can try to collect it through whatever legal means are available to them.

Usually, this means sending the cardholder an invoice for the disputed amount, and if they ignore the invoice, turning their account over to a debt collection agency. The debt collectors will then use their own resources and methodology to try to convince the cardholder to pay up.

When selecting a debt collection agency to work with, merchants should seek out referrals from trusted partners and always look carefully at the agency’s reviews and track record. Debt collectors may need to be licensed in the states they practice in, so e-commerce merchants with a nationwide customer base need to make sure they’re working with an agency that has the right licensing to deal with them. 

What Are the Advantages of Using Debt Collectors to Recover Chargebacks?

Debt collection is a completely separate process from chargeback representment. You can pursue debt collection options before, during, or after going through the chargeback dispute process with the issuer and card network.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanyChargeback representment only allows you to recover the disputed transaction amount—you’re still on the hook for chargeback fees and other associated costs. If you send the account to a debt collector, they can try to recover those additional amounts.

Debt collection sends a message: don’t mess with us. Nobody wants to deal with debt collectors, and their presence can act as a powerful deterrent. Cardholders who thought they could easily get away with some light friendly fraud shenanigans may quickly decide to pay up and leave you alone once the collectors contact them.

What Are the Disadvantages of Using Debt Collectors to Recover Chargebacks?

Debt collection doesn’t come cheap. While you can use it to recover fees and other extra costs, you also have to pay the collectors. Their fees are usually calculated as a percentage of the revenue they recover. These fees may be well worth it if they enable you to recover funds that would have been lost forever otherwise, but for this reason alone it’s always better to try chargeback representment as your first option.

The other big downside is that yes, debt collectors can act as a deterrent to fraudsters, but debt collectors and their methods are viewed so negatively by so many consumers that if word gets out that you’re sending collection agencies after delinquent accounts, you may find that your regular customers start avoiding you too.


No two merchants are exactly alike, and at the end of the day, every merchant has to make choices that make sense for their industry, their customer base, and the kind of business they’re trying to run.

Whether or not using debt collectors to respond to unsatisfactorily resolved chargebacks is an individual choice that depends on many factors.

For large purchases with a high price tag attached, it may make good financial sense—and be justifiable from the standpoint of maintaining a good reputation with your customers—to do so. Sending debt collectors after comparatively small amounts to get back at fraudsters, however, might not yield many benefits.

No matter what the situation, it’s usually a good idea to work through the chargeback process first and try to use representment to obtain a fair outcome. Better yet, analyze your chargebacks so you can figure out why they’re happening and come up with effective prevention methods to stop them preemptively.

One of the most dangerous aspects of chargebacks is the fact that they’re tracked and monitored, and too many can get you penalized by your acquirer or processor. Neither representment nor collections erase the negative impact that each chargeback has on your ratio, so advance prevention is always the strategy with the greatest payoff.

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