If you have fallen behind on payments for credit cards, loans, or other types of debt, you might be referred to a collection agency. If you have a debt assigned to collections, you may be subjected to harassing phone calls and letters from the agency trying to collect the money owed to them.
Ignorance is not bliss if you find yourself in this predicament. To avoid being taken advantage of, you should know how debt collection firms operate and what legal recourse you may have.
What is debt collection?
This is the process through which a collection agency or business pursues repayment of overdue debts from individuals who owe them money. If your loan or credit card payments are past due, a debt collector may try to get in touch with you.
Debt collection agencies might call you if you co-signed a loan or are an authorized user on someone else’s credit card and they are trying to be paid. And so on.
Debt collection agencies are private businesses that pursue debts on behalf of their clients. When the original creditor hires a debt collection agency, the agency gets paid by the creditor in the form of a commission. If you don’t repay the debt to the original creditor, the debt collection agency may buy out the loan for “pennies” and then go after you.
Is there a distinction between credit collection and debt collection?
Credit and debt collection processes are similar but different.
Credit collection is the practice of requesting and receiving money from consumers who have made credit-based purchases. Working up payment arrangements with clients, reminding them of their obligations, and going to court are all part of this process.
The term “debt collection” describes the practice of pursuing payment from debtors who have yet to pay their outstanding balance. This could mean getting in touch with the debtor, setting up a payment plan, and, if necessary, taking legal action. Debt collection, which is different from credit collection, can involve getting people to pay back a wide range of debts.
Credit collection, in brief, refers to the practice of obtaining payment from consumers who have bought purchases on credit, whereas debt collection refers to the practice of obtaining payment from those who owe money but have yet to pay it back.
Companies That Buy Debt
In cases where the initial creditor realizes it has little chance of being repaid, it may choose to sell the debt to a debt buyer to minimize its losses. Financial institutions often offer bundles of accounts that have common characteristics. Debt purchasers may choose from a variety of options, including:
- Recent debts that currently have no other external collecting activity
- Old inactive accounts that previous collectors have failed to collect on
- Somewhere in between
Debt buyers usually buy these bundles through competitive bidding, and they usually pay about $0.04 for every $1 in nominal debt. For example, a debt buyer may offer $40 for a past-due account with a $1,000 balance. Debt that is many years old has a lower price tag since it is less likely to be collected.
The cost depends not only on the amount of debt but also on its kind. In contrast to house debt, the value of utility debt is much lower.
Debt purchasers are entitled to retain whatever funds they get. They assumed the risk associated with the debt when they bought it from the original creditor (and paid the original creditor in advance), so now the debt is theirs, and the money they collect belongs to them.
Debt Collection Agencies: Who Are They?
Debt collection agencies are third-party organizations that help collect overdue debts (more than 60 days late) on behalf of the original creditors. Some debt collectors work individually, while others are employed by debt collection organizations. Some of them are even lawyers.
Find out more about collecting agencies and the role of collectors.
How Collection Agencies Work
When it comes to collecting debts, the tactics used by different businesses might be different. Medical debt and student loan debt are only two examples of specialized debts that certain organizations focus on exclusively. Some people have to cope with debt from many years ago. The statute of limitations on debt changes from state to state, and some people may choose to ignore it if there is still time.
The period you have to pay back a debt that is already past due is two months, but collection agencies can keep going after the debt for as long as they need to. It is contingent upon the debt collection agency, the total amount owed, and the nature of the debt.
Your initial creditor will normally notify you of an overdue debt through written notifications and phone calls. For people who need to catch up on their student loan payments, for example, the lender may try to contact them to remind them that the payments are due. It will cease trying to do so if it does not convince you to pay your debt. At this point, the debtor’s relationship with the original creditor often shifts to that of a debt collector.
How Collection Services Make Money
Debt collection firms often focus on a narrow range of debts. For example, a collection agency may only pursue debts that are at least $200 and less than two years old. An honest organization will also stop trying to collect on debts that are beyond the state-mandated deadline. If the debt is still new, the creditor can legally keep trying to get paid as long as they do it before the statute runs out.
The collector is paid a portion of the total amount collected, usually between 25% and 50%. Credit card debt, vehicle loans, hospital bills, personal loans, school loans, business loans, and even overdue utility and cell phone bills are some of the debts collection agencies may collect.
Some debt collectors may even try to settle with clients for less than the total amount due in cases where collection efforts have been fruitless. When clients refuse to pay their debts, collection agencies often direct them to attorneys who will sue.
Collectors are compensated for their efforts only if the debt is successfully collected.
Earnings are proportional to the amount of data recovered. Collectors can make a lot of money by buying old debt that has passed the statute of limitations or is otherwise thought impossible to collect.
How legitimate collectors do business
Debt collection companies range from those that don’t follow the law and act unethically to those that do follow the law and act professionally when trying to get money back on delinquent accounts.
Letters from legitimate debt collectors will be sent to the address you provided to your creditor. Agencies attempting to collect a debt from you may use whatever means available to determine whether or not you have relocated before sending collection letters to your new address. Debt collection companies are required by law to provide you with the following information whenever they contact you by phone or mail:
- The original debtor’s name.
- The sum is due to them (including late fees and other charges).
- Conditions for you to challenge the debt in question.
You have 30 days after the collector sends you a written notice to challenge the debt. The original creditor’s contact information must be provided upon request. Pay attention to collection calls from a collection agency; they’ll keep coming if you challenge your debt within 30 days.
Businesses that play by the rules will operate within the statute of limitations. This varies depending on the sort of debt you owe and your state of residence. Nonetheless, you may get many calls from them in a single day, all of which will fall within the specified contact time window of 8 a.m. to 9 p.m.
When a collection agency does its job properly, they will not harass or threaten you. An organization is not behaving legally if they threaten to have you arrested, call the police, or otherwise go after you.
How to deal with debt collectors
This detailed information is meant to assist you through the collection procedure if your debt ever gets that far.
1. Verify the debt.
The (FDCPA) says that companies that collect debts must send debt validation letters before they get paid. This is an important step since it establishes ownership of the loan.
The amount owing, the nature of the debt, the creditor’s identity, and other relevant facts will all be included in a debt validation letter. Debts that include obvious mistakes must be contested within 30 days.
2. Learn about the many ways you might pay for this.
Generally, you may choose between two different methods of debt repayment. You can make a single lump-sum payment or set up a repayment plan to settle the outstanding debt. It is important to consider your financial situation and the total amount of your debt when deciding which course of action is best for you.
Determine your budget for a down payment before settling on a plan. Working with a credit counselor or enrolling in a debt management program are two options for reducing your debt load and negotiating more manageable repayment terms with your creditors.
3. The payment process should start immediately.
Contact your debt collector and get a formal agreement before you start making payments. You may begin making payments when you have received the agreement and had a chance to examine it for correctness.
After sending out your first payment, follow up with the collector to verify receipt and record any payments going forward.
The significance of the FDCPA in debt collection
The (FDCPA) protects you as a customer from debt collectors who are rude or try to scare you. Strategies that are forbidden include the following:
- To intimidate you into paying by impersonating a legitimate authority figure (such as a barrister or police officer).
- Making up stories about the debt, including that you owe more than you do or that it originated from a different source.
- Use of other dishonest or aggressive tactics, such as threatening to have you jailed, is also prohibited.
Anybody pretending to be a debt collector or a debt collector themselves might be reported to the appropriate authorities if they engage in abusive behavior.
Creditors and collection agencies can use the legal system to get money back for debts that haven’t been paid. You owe money to businesses if you’ve been late with payments or have yet to make any at all. Debt collectors might slam you with calls and letters if you don’t.
Even if you do owe money, debt collectors cannot treat you unfairly or abusively in any way. If a debt collector harrasses you, you may take immediate action. You may submit a complaint to the federal authorities or your state attorney general.