If you’ve recently been contacted by a debt collector for the first time, or you’re worried that a collector will contact you soon because you’ve fallen behind on your bills, you probably have many questions and are understandably nervous about the process.
This article will give you an introduction to the debt collection business so you can understand the collection agency’s perspective. This should give you a better idea of what motivates debt collectors and what their incentives are, which can help smooth your interactions with them and make the process less stressful.
The Business of Debt Collection
Debt collectors often work for debt-collection agencies, though some operate independently and some are also attorneys. Sometimes these agencies act as middlemen, collecting customers’ delinquent debts – debts that are at least 60 days past due – and remitting them to the original creditor. The creditor pays the collector a substantial percentage, typically 25% to 45%, of the amount collected. Debt collection agencies collect delinquent debts of all types: credit card debt, medical debt, automobile loan debt, personal loan debt, business debt, student loan debt and even unpaid utility and cell phone bills.
Collection agencies tend to specialize in types of debt. For example, an agency might only collect delinquent debts of at least $200 that are less than two years old. A reputable agency will also limit its work to collecting debts that are within the statute of limitations, which varies by state.
For difficult-to-collect debts, some collection agencies also negotiate settlements with consumers for less than the consumer owes. Debt collectors may also refer cases to lawyers who file lawsuits against customers who have refused to pay the collection agency.
Agencies That Buy Debt
When the original creditor has determined that it isn’t likely to collect, it will cut its losses by selling that debt to a debt buyer. Creditors package together numerous accounts with similar features and sell them as group. Debt buyers can choose from packages of accounts that are not that old and that no other collector has worked on yet, accounts that are quite old and that other collectors have failed to collect on, and accounts that fall somewhere in between.
Debt buyers often purchase these packages through a bidding process, paying on average 4 cents for every $1 of debt face value. In other words, a debt buyer might pay $40 to purchase a delinquent account where the balance owed is $1,000. The older the debt, the less it costs, since it is less likely to be collectable.
The type of debt also influences the price; mortgage debt is worth more, while utility debt is worth less. Debt buyers keep everything they collect; because they have purchased the debt from the original creditor, they don’t send any of the amount collected to that creditor.
Debt collectors get paid when they recover a delinquent debt; the more they recover, the more they earn. Old debt that is past the statute of limitations or is otherwise deemed uncollectable is bought for pennies on the dollar, making collectors big profits.
What Debt Collectors Do
Debt collectors use letters and phone calls to contact delinquent borrowers and try to convince them to repay what they owe. When debt collectors can’t reach the debtor with the contact information provided by the original creditor, they look further, using computer software and private investigators. They can also conduct searches for a debtor’s assets, such as bank and brokerage accounts, to determine a debtor’s ability to repay. Collectors may report delinquent debts to credit bureaus to encourage consumers to pay, since delinquent debts can do serious damage to a consumer’s credit score.
A debt collector has to rely on the debtor to pay and cannot take a paycheck or reach into a bank account, even if the routing and account numbers are known, unless a judgment is obtained, meaning that the court orders them to repay a certain amount to a particular creditor. To do this, a collection agency must take the debtor to court before the statute of limitations runs out and win a judgment against him or her. This judgment allows a collector to begin garnishing wages and bank accounts, but the collector must still contact the debtor's employer and bank to request the money.
Debt collectors also contact delinquent borrowers who have already had a judgment against them. Even when a creditor wins a judgment, it can be difficult to collect the money. Along with placing levies on bank accounts or motor vehicles, debt collectors can try placing a lien on property or forcing the sale of an asset.
How Reputable Collectors Operate
Debt collectors have a bad reputation for harassing consumers. More consumers complain to the Federal Trade Commission about debt collectors than about any other industry. The Fair Debt Collection Practices Act limits how collection agencies can collect a debt in order to keep them from being abusive, unfair and deceptive, and there are debt collectors who are careful not to violate consumer protection laws. Here’s what you can expect from a reputable collector.
In contacts with debtors, a collector who behaves properly will be fair, respectful, honest and law-abiding. After you make a written request for verification of a debt you've been contacted about, the collector will suspend collection activities and send you a written notice of the amount owed, the company you owe it to and how to pay it. If the collector can’t verify the debt, the company will stop trying to collect from you. It will also tell the credit bureaus that the item is disputed or request that it be removed from your credit report. If the collector is working as a middleman for a creditor and doesn’t own your debt, it will notify the creditor that it has stopped trying to collect because it couldn’t verify the debt.
Collectors must also follow certain time limits, such as not reporting a debt that is more than seven years old and sending a debt validation letter within five days of first contact with the debtor.
Reputable debt collectors will try to obtain accurate and complete records so they don’t pursue people who don’t really owe money. If you tell them the debt was caused by identity theft, they will make a reasonable effort to verify your claim. They also won’t try to sue you for debts that are beyond the statute of limitations. They will not harass or threaten you or treat you differently because of your race, sex, age or other characteristics. They will not publicize any debt you owe or try to deceive you in order to collect a debt, nor will they pretend to be law enforcement agents or threaten you with arrest. They also won’t contact you before 8:00 a.m. or after 9:00 p.m. without your permission to do so.
To learn more about what debt collectors are not allowed to try on you, read "5 Things Debt Collectors Are Forbidden to Do."
The Bottom Line
Debt collection is a legitimate business, and if a debt collector contacts you, it’s not necessarily the beginning of an abusive relationship. Many collectors are honest people who are just trying to do their jobs and will work with you to create a plan to help you repay your debt, whether that means a payment in full, a series of monthly payments or even a reduced settlement.
You should of course put up your guard when a collector contacts you, and you should know your rights and understand what debt collectors are and aren't allowed to do. But if you know a bit about how the business works, you might be able to resolve your delinquent debt amicably.
One cautionary note: Debts fall under a statute of limitations. If you think this could be an issue in your situation, do not admit to the debt or discuss any settlement without legal advice; taking even the smallest step could void the statute of limitations and restart the clock. See "Do I Still Owe Debt Collectors for a Debt That's Past the Statute of Limitations for My State?
You’ll also want to read "How to Confront a Debt Collector" to understand your rights and obligations.