How Collection Agencies Work

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How Collection Agencies Work

When does your debt get turned over to a collection agency?

Paying your bills and making your loan payments on time is an important financial behavior that can lead to a higher credit score. If you find yourself getting behind in paying your bills, the creditor you owe money to will be in contact with you and work with you directly to settle your debt. After six months, the creditor will likely hire and pay a collection agency to try to collect on your past-due payments. They may even sell your past due debt directly to the collector for a fraction of what you owe. The debt collector’s goal is to collect more than they paid for the debt.

It is important to understand that the collection agency will likely report your delinquent debt to the credit agencies. This will result in a negative entry on your credit report.

Standard collection practices

Collectors can contact you in a variety of ways including phone, email, letters and text as long as they disclose that they are debt collectors and follow the rules outlined in the federal Fair Debt Collection Practices Act. Regardless of how they communicate with you, they cannot pretend to be someone else, like a government agency or attorney. They also cannot harass, threaten or deceive you.

Debt collectors must tell you the name of the creditor, the amount you owe, and how you can dispute or seek verification of the debt. They will likely contact you frequently. It is in your best interest to work to resolve the issue with them. If you negotiate an agreement or pay the debt in full, be sure to get written verification that it has been settled.

If you have problems with a debt collector, report them to your state attorney general’s office, the Federal Trade Commission, and the Consumer Financial Protection Bureau.

Handling collection agencies and creditors

You need not be at the mercy of collectors, though it is to your advantage to work with them. If you are bothered by collection agencies calling you and demanding payment on your debts, know that federal law prohibits bill collectors at collection agencies from calling you at "unreasonable" hours. "Unreasonable" usually means before 8 am and after 9 pm.

What collectors cannot do

The government puts a number of prohibitions on collector behavior. Collectors are, to name a few actions, forbidden to harass you, add unauthorized charges to your account, and use false statements on you. They may not contact you at work if they know your employer disapproves. They must identify themselves to you on the phone. Also, you are allowed to demand in writing that the collection agency stop contacting you.

The Fair Debt Collection Practices Act does not apply to the collections department of a creditor; only to outside collectors. There are a few exceptions to this exception at the state level, so contact your state’s consumer protection bureau to see what practices it prohibits.

The most effective action

Your most effective action will definitely be to deal with the collector. It can prevent the damage to your credit from getting any worse, and it can help you regain lost privileges (for example, a suspended online auction account). If you do not cooperate, the creditor can sue you and get a court judgment. The judgment can let the creditor garnish your wages (up to 25%), seize bank accounts, or put a lien on property you own. Court judgments can last many, many years, and in many states the creditor can renew them afterward.

One last note: All states allow the collection of interest on debts.