It could come as a dreaded 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 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, often for pennies on the dollar, and then attempting to get the original amount owed from the borrower.
A bill that’s 30 days past due is otherwise known as a delinquent account. Lenders and creditors have some leeway when they report overdue debts to credit bureaus. For borrowers who continually miss payments, a lender may report a missed payment right at the 30-day mark. But for a borrower who has a positive repayment record, a lender might allow a few missed payments before reporting it to the credit bureaus.
A debt is typically not sent to a collection agency until several months have gone by and your lender no longer wants to put effort into collecting 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.
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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, but they are restricted by the Fair Debt Collection Practices Act (FDCPA), 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 power to get you to pay your old debt.
What Is a Debt Collector?
A debt collector can be either an individual person or an agency. In either case, their task is to collect overdue debts from those who owe them. Sometimes referred to as collection specialists, an individual debt collector may be responsible for many accounts. They may be paid a base salary plus commission, so have a high incentive to convince the debtor to pay.
What Do Collection Agencies Do?
Debt collection agencies are hired by creditors and are generally paid a percentage of the amount of the debt they recover for the creditor. The percentage a collection agency charges is typically based on the age of the debt and the amount of the debt. Older debts or higher debts may take more time to collect, so a collection agency might charge a higher percentage for collecting those.
Some agencies may also charge a flat fee for collecting a debt. Others work on a contingency basis and only charge the creditor if they are successful in collecting on the debt.
The debt collection agency enters into an agreement with the creditor to collect a percentage of the debt — the percentage is stipulated by the creditor. One creditor might not be willing to settle for less than the full amount owed, while another might accept a settlement for 50% of the debt.
When the debt is collected, the agency takes its payment from the amount paid and sends the remainder to the creditor.
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How is this different from a debt buyer?
The main difference between a debt collector and a debt buyer is the stage the debt is with the creditor. If a creditor is still trying to collect a debt, either on its own or through a debt collection agency, the debt is considered to be a current debt. But if a creditor has given up trying to collect a debt, they may write off — or charge off — the debt, no longer expecting it to be paid.
A debt collector is hired by the creditor to attempt to collect what is owed on the current debt by the debtor.
A debt buyer, in comparison, doesn’t work for the creditor like a debt collector does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. They may pay very little for the debt, sometimes just a few cents of what was originally owed. Debt buyers then attempt to collect the debt, sometimes using aggressive tactics.
The debt buyer buys only an electronic file of information, often without supporting evidence of the debt. The debt is also generally very old debt, sometimes referred to as “zombie debt” because the debt buyer tries to revive a debt that was beyond the statute of limitations for collections.
How To Deal With a Debt in Collections
Debt collection agencies may contact you either in writing or by phone.
If your first instinct is to hang up when you get a phone call from a debt collector, you’re not alone. But not talking to them won’t make the debt go away, and they may just try alternative methods to contact you, including suing you. When a debt collector calls you, it’s important to get some initial information from them, such as:
• The debt collector’s name, address, and phone number.
• The total amount of the debt they claim you owe, including any fees and interest charges that may have accrued.
• The date the debt was incurred and who it was originally owed to.
• Proof they have that the debt is actually yours.
The debt collector must let you know that you have the right to dispute the debt and how to do so. If they don’t say this in their first contact with you, they must notify you of your right to dispute within five days of their initial contact with you. Under the FDCPA, a debt collector must send a debt validation notice, which must include certain information.
• The letter must state that it’s from a debt collector.
• Name and address of both the debt collector and the debtor.
• The creditor or creditors to whom the debt is owed.
• An itemization of the debt, including fees and interest.
They must also inform you of your rights in the debt collection process, and how you can dispute the debt.
• If you don’t dispute the debt within 30 days of their first contact with you, they’ll assume the debt is valid.
• If you do dispute the debt within 30 days, they must cease collection efforts until they provide you with proof that the debt is yours.
• They must provide you with the name and address of the original creditor if you request that information within 30 days.
The debt validation notice must include a form that can be used to contact them if you wish to dispute the debt.
The FDCPA ensures that consumers aren’t harassed during the collections process. Some things debt collectors cannot do are:
• Make repeated calls to a debtor, intending to annoy the debtor.
• Threaten physical violence.
• Use obscenity.
• Lie about how much you owe or pretend to call from an official government office.
How Does a Debt in Collections Affect Your Credit?
Generally, unpaid debt is reported to the credit bureaus when it’s 30 days past due. If payments continue to be missed, additional late payments will be reported, and with each missed payment, your credit is likely to be negatively affected.
If your debt is transferred to a debt collector or sold to a debt buyer, an entry will be made on your credit report. Each time your debt is sold, if it continues to go unpaid, another entry will be added to your credit report.
Each negative entry on your credit report can remain there for up to seven years, even after the debt has been paid. This, of course, will likely affect your credit score. Higher credit scores may take a greater hit than lower scores.
A late payment or collections entry on your credit report could lower your credit score by as much as 110 points, a debt settlement entry could lower it by as much as 125 points, and a bankruptcy could lower it up to 240 points.
The Takeaway
If you’ve received a phone call or letter from a debt collector, but don’t know how debt collection agencies work, the information here is helpful, basic information. Avoiding a collector won’t make your debt disappear — it’s better to get all the information you can from the debt collector to help you make informed choices as you go through the collections process or dispute the debt.
If you’re beginning to have trouble managing multiple high-interest debts, consolidating them into one personal loan might be a smart financial move. SoFi Personal Loans have competitive, fixed interest rates that can be lower than credit card interest rates for qualified borrowers. Having a fixed-rate vs. a variable-rate loan can help you get out of debt by having a payment end date.
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