What Is a Debt Collection Agency?
A debt collection agency is a company that attempts to collect delinquent debts from individuals or businesses, either on behalf of the original creditor or on its own. Debt collectors are subject to federal and state laws on what they are allowed to do and not do.
Key Takeaways
- Debt collection agencies are businesses that creditors can hire to recover delinquent debts they have been unable to collect through their own efforts.
- Debt collectors may also purchase debt from the original creditor and attempt to collect it for their own benefit .
- Some collection agencies will negotiate settlements with debtors for less than the full amount owed.
- Debt collection agencies and debt collectors are subject to federal and state laws aimed at preventing abusive practices.
How Debt Collection Agencies Work
Debt collection agencies can be hired by creditors to collect debts they are owed but have been unable to collect through their own efforts.
Those debts can include credit card accounts, medical bills, various types of loans, and even unpaid utility bills. If the collection agency is successful, the creditor typically pays a percentage, often 25% to 50%, of the amount the agency recovered.
For difficult-to-collect debts, some collection agencies will negotiate settlements with borrowers for less than the amount owed. Debt collectors may also refer cases to lawyers who file lawsuits against debtors who have refused to pay.
Some debt collection agencies work on their own behalf. They buy delinquent debt from the original creditor—usually for pennies on the dollar—and then attempt to recover as much of it as possible. Whatever they recoup is theirs to keep.
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What Do Debt Collectors Do?
Whether they're working for another creditor or for themselves, debt collectors work in similar ways. They will attempt to contact delinquent borrowers through phone calls and letters and try to persuade them to pay what they owe. They can also conduct searches for a debtor's assets, such as bank and brokerage accounts, to determine their ability to repay.
A debt collector has to rely on the debtor to pay and cannot seize a paycheck or reach into a bank account, even if the routing and account numbers are known—unless the debt collector has obtained a court judgment ordering the debtor to pay.
To accomplish that, the debt collector must sue the debtor before the statute of limitations runs out and win a judgment against them. (Different states have different statues of limitations on how old a debt can be before it becomes "time-barred," freeing the debtor from responsibility to repay it.) A court judgment allows a collector to begin the process of garnishing wages and bank accounts, although the collector must still work through the debtor's employer or bank to obtain the money.
Debt collectors may also contact delinquent borrowers who already have judgments against them.Even when a creditor wins a judgment, it can be challenging to collect the money. Along with placing levies on bank accounts or motor vehicles, debt collectors can try placing property liens or forcing the sale of an asset.
Legal Restraints on Debt Collectors
Debt collectors have a longstanding reputation for harassing consumers. The Federal Trade Commission (FTC) has said it receives more complaints about debt collection than any other single industry.
The federal Fair Debt Collection Practices Act lays out rules for what debt collectors are and aren't allowed to do in their interactions with debtors and other parties. For example, debt collectors generally aren't allowed to call before 8 a.m. or after 9 p.m. They cannot harass the debtor with excessive phone calls or other communications, use obscene language, or make physical threats.
Debt collectors are also required to provide certain information about the alleged debt—including the name of the original creditor, any account number, and the amount—and give the debtor an opportunity to dispute the information if they believe it to be in error.
Reputable debt collectors will follow these rules. But anyone who encounters a debt collector who doesn't can file a complaint with the Federal Trade Commission, the Consumer Financial Protection Bureau, or their state attorney general's office. In addition, consumers have a legal right to sue for damages. As the Consumer Financial Protection Bureau explains, "If you prove a violation occurred, you may be awarded $1,000 in damages, plus additional compensation for any actual harm they caused. If you win, the collector may also be responsible for paying your lawyer fees and costs."
How Can a Debt Collector Contact Me?
A debt collector can contact you by calling you, emailing you, or sending mail to you—although not excessively. A debt collector cannot contact you at work or outside the hours of 8 a.m. to 9 p.m. unless you have agreed to it. You can also tell a collection agency to stop contacting you by writing a letter to that effect, although that won't make the debt go away.
What Is the Statute of Limitations on Debt?
The statute of limitations on debt refers to how long a debt collector has if it wishes to sue you to collect a particular debt. The time period varies by state and is often from three to five years. Note that even after the statute of limitations has expired you still owe the debt and the debt collector can continue to try to collect it by other means.
Can a Debt Collector Take Money From My Paycheck?
Debt collectors cannot take money from your paycheck unless they have authorization to garnish your wages through a court order.
Where Do I Report a Debt Collector?
If you want to report a debt collector for potentially illegal activity, you can contact the Federal Trade Commission, the Consumer Financial Protection Bureau, or your state attorney general. You may also sue.
The Bottom Line
Debt collectors and collection agencies serve a legitimate purpose by helping creditors recover at least a portion of money they are owed. Debt collection practices are governed by both federal and state consumer protection laws, and legitimate debt collectors will abide by them.
