How Debt Collection Agencies Work

April 22, 2019 · 4 minute read

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How Debt Collection Agencies Work

It could come as a dreaded red envelope in your mailbox, or as a call from an unknown number you’re afraid to take. Whether you’re receiving calls or mail from a debt collector or are going out of your way to avoid either (or both!), you’ll probably want to know: How do debt collection agencies work?

How Do Bills End Up in Collections?

If you don’t pay a bill for a long time , it can end up “in collections,” which means that it has been sent to a debt collector whose job is to try and get you to pay up. (How long is a “long time” you ask? It varies, depending on the type of debt and where you are.) Many types of debt, from an unpaid magazine subscription to a missed credit card payment, can end up in collections if they go unpaid.

If you miss a bill payment, it is technically considered “delinquent,” which means you have a payment outstanding. However, the delinquency is only reported to the major credit bureaus after a certain period of time, which may vary based on the type of debt, among other factors.

For example, a delinquent (or late) credit card payment will only be reported to the credit bureaus after 30 days—and it can then negatively affect your credit score, Being delinquent, however, does not necessarily mean your bill is in collections.

An unpaid bill is typically not sent to a collection agency until several months have gone by and your lender no longer wants to try to personally collect the debt from you. Instead, the lender might either enlist an agency that is hired to collect third-party debts or sell the debt to a collection agency. Once the debt has been sold to a debt collection agency, you may start to get calls and/or letters from that agency.

How Do Collection Agencies Work?

At their most basic, debt collection agencies exist in order to try to get borrowers to pay their overdue debts. Debt collection companies make money by buying debt from lenders for pennies on the dollar and then trying to make the borrower pay back the original amount owed. Keep in mind that even if your debt is sold to a collection agency, the agency can still ask that you pay the entire debt.

The debt collection industry is heavily regulated, and borrowers have many rights when it comes to dealing with bill collectors. Debt collectors are allowed to try to get you to pay up, but they are restricted by the Fair Debt Collection Practices Act , which prohibits them from harassing you or lying to you in order to collect your debt. Despite this, debt collectors will try everything in their arsenal to get you to pay your old debt.

When Could a Debt Collector Sue over Unpaid Debt?

Debt collectors are bound by strict legal limits on the amount of time they have to sue over uncollected money. So when will a debt collector sue over unpaid debt?

Depending on your state’s statute of limitations for debt collection, a collection agency may only have three to six years to sue over an unpaid debt. Of course, some debt, like federal student loans, is not subject to statutes of limitations .

It is important to remember that just because the statute of limitations that governs the debt has expired doesn’t mean you don’t owe that money. Running out the statute of limitations does not erase your debt or even necessarily prevent the collection agencies from trying to make you pay up.

Avoiding Ending up in Collections

Managing your debt is one important part of staying financially healthy, but that doesn’t mean it is always easy. Luckily, there are several steps you can take to help ensure that you don’t end up on the receiving end of stressful collection calls.

One easy consideration to avoid inadvertently being hounded by debt collectors is to set your monthly bills up on an “autopay” schedule tied to your bank account. Putting your bills on autopay can help you avoid accidentally forgetting to pay a bill that could eventually end up in collections.

Of course, not having the necessary funds in your account when a bill is scheduled to come out may also eventually result in calls from collections, as well as fees from your bank, so it is important to plan in advance to cover the auto-debit costs.

If you’re worried that some of your debts could end up in collections, there are things you can do to help get back on track. A great first step can be just contacting the agency trying to collect debt payments from you.

If, for example, you’re worried about ending up in collections because of an overdue medical bill that you can’t pay, you might consider contacting the hospital that issued the bill. You may discover that the hospital has payment plans or can point you towards other payment assistance.

Using a Personal Loan to Pay Off Debt

If you’re worried about keeping a high-interest debt out of collections, one option may be to take out a lower-interest personal loan in order to consolidate high-interest debt. Here’s the deal: Credit cards in particular often have very high interest rates, which means that as long as there is an overdue balance on your credit card, you may continue to accrue significant interest charges.

That interest can mean higher payments, which could lead to more time spent in debt.. You may be able to pay less in interest if you qualify for a low-rate personal loan.

Using a personal loan to pay off high-interest debt, like credit cards, can help you consolidate your debt into one easy-to-manage monthly payment. Dealing with one lower payment may help keep your finances stable and your debt out of collections—and help keep those collection calls and red envelopes from plaguing you.

Curious about how a personal loan could help you consolidate your debt? Check out SoFi personal loans to see if you qualify.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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