How Collection Agencies Operate

By Courtney Dodson

What do collection agencies do?

Collection agencies collect various types of delinquent debt from consumers. This could be debt from a buy now, pay later (BNPL) loan, credit card, personal loan, business loan, or many other types of lending. The collection agency typically acts as a go-between, working for the issuing creditor of the loan or for a debt buyer, who purchased the past-due account from the issuing creditor. Collection agencies never actually own the debt they are hired to collect. Because of this, they don’t get to keep the money they recover—instead, they earn a percentage of what they collect. 

As illustrated above, a collection agency can be hired by either an issuing creditor or a debt buyer.

The collection process

Collection agencies attempt to contact delinquent borrowers by phone, mail, and recently through digital outreach methods, too. Generally, the issuing creditor or debt buyer provides this contact information. If the information is no longer up to date, the collection agency may also search for the borrower online, with a private investigator, or contact their relatives. 

If it seems difficult to collect from a borrower, the collection agency can report the delinquent debt to the credit bureaus. Since bad debt damages the consumer’s credit score, this applies additional pressure that may cause the consumer to pay. 

Collection agencies may also choose to refer cases to lawyers, so they can file lawsuits against individuals who refuse to repay their debt. However, the delinquent borrower must be taken to court before the statute of limitations expires. In the context of consumer debt, a statute of limitations is the amount of time in which a debt can be pursued. This varies by state and by debt type, but the debt is considered “time-barred” once the statute of limitations has passed. Consumers should be careful when dealing with time-barred debts, because making even a small payment on it can cause the statute of limitations to restart—making the borrower legally responsible for the debt again. 

Working with a collection agency

If you have been contacted by a collection agency, it’s your legal right to submit a written request for verification of the debt you were contacted about. Within five days, the collection agency must send a debt validation letter that confirms the amount of the debt, who you owe, and how to pay.

If the collection agency cannot verify the debt after you request it, they should stop their collection attempts and notify the credit bureaus that the debt is disputed, so it can be removed from your credit report. If the collection agency was working for an issuing creditor, it should also let them know that collection activity was stopped because the debt couldn’t be verified. 

For verified debts that are difficult to collect, some collection agencies may be willing to negotiate. If you’re able to offer a lump sum payment, the collection agency may be inclined to settle for less than the total amount owed. If you agree to any new terms, be sure to have the settlement agreement sent to you in writing before beginning repayment. 

Pros & cons of collection agencies

Collection agencies have a poor reputation for hassling consumers, but there are laws in place to keep them from being unreasonable and dishonest. The Fair Debt Collection Practices Act (FDCPA) prevents certain tactics like pretending to work for the government, threatening to have you arrested, publicly shaming you, calling you outside the hours of 8 AM to 9 PM without your permission, and more.

A legitimate collection agency, however, may be willing to work with you to create a new plan for debt repayment, whether that means full repayment, a reduced settlement, or a series of monthly payments. The most important thing is to familiarize yourself with your rights, so you know what to do if someone contacts you. 

If your debt is time-barred and not legally collectable anymore, you can decide whether to repay it. If you’re choosing to repay the debt out of moral obligation, it’s worth considering who is collecting the money—is it the issuing creditor, a collection agency, or a debt buyer who purchased your debt? Depending on the answer, your money may not go to the original lender. Another valid reason to repay the debt could be to improve your credit score, since bad debts remain on your credit report for seven years.

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