What is a collection agency?
A collection agency is a company used by lenders or creditors to collect funds that are overdue or on defaulted accounts. Often, a creditor will engage a collection agency after several unsuccessful attempts to collect their debts. A lender may outsource the debt collection activity to a third party (the collection agency), or it may have an in-house debt collection department or subsidiary that does this.
Key points to remember
- A collection agency is a company that lenders use to collect funds that are overdue or on defaulted accounts.
- Collection agencies work closely with credit bureaus and lenders to try to collect overdue funds.
- Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA) and bound by rules about what they can and cannot do to collect funds.
How a Collection Agency Works
When a borrower defaults on their debts or fails to make scheduled loan payments, the creditor will report this default to a credit bureau. Then, not only will the borrower’s credit history be tarnished, but their debt will also be turned over to a collection agency within three to six months of default.
When a borrower pays
If the borrower pays his debt through the efforts of the collection agency, the creditor pays the collection agency a percentage of the funds or assets it recovers. Depending on the initial agreement with the creditor, the debtor may have to pay all of the debt at once or part of it at once.
When a borrower does not pay
If the borrower is still unwilling or unable to cover their arrears, the collection agency may update the borrower’s credit report with a “collection” status, resulting in a lower credit score. individual’s credit. A low credit score can affect a person’s chances of getting a long-term loan, as a debt collection account can stay on their credit report for up to seven years.
Collection agencies deploy several strategies to attempt to recover funds, such as the following:
- Call the debtor’s home and business phones
- Sending numerous late payment notices to the debtor
- Contacting a debtor’s family, friends and neighbors to confirm the debtor’s contact details
- Report to the front door of the individual
Debt Collection Agencies Regulation
Third-party collection agencies, but not in-house creditor collection services, are bound by the Fair Debt Collection Practices Act (FDCPA), some rules of which are listed below.
A debt collector can not do the following:
- Collect an old debt that has been written off as “uncollectible” – the debtor has filed for bankruptcy or cannot be found
- Suing or threatening to sue a borrower because of their debt
- Legally seize a debtor’s assets, unless the collection agency has won a lawsuit against a debtor
- Physically injure or threaten to injure a debtor in an attempt to obtain payment
- Contact a person at work if they have explicitly stated that their employer does not approve of such calls
However, a collection agent can do the following:
- Attempt to collect a debt whose statute of limitations – usually between four and six years from the first day of default – has expired
- Call an individual between 8 a.m. and 9 p.m. only
- Contact the debtor’s employer about outstanding child support and alimony, federal student loans, or taxes