What is debt collection and how does it work?


If you miss credit card or loan payments or other types of unpaid debts, your outstanding balance may be sent to a debt collection agency. Having a debt sent to collections can be a stressful situation which includes receiving regular phone calls and letters from the agency attempting to collect the debt.

If you find yourself in this situation, it is important to understand how debt collection agencies work and what protections and assistance may be available to you.

COVID-19 Debt Protections

If you’re having trouble making your payments due to COVID-19 or think you’ll have trouble with them later, contact your lender directly. While many COVID-19 relief and support programs are winding down or have been discontinued, some lenders and credit card issuers continue to offer hardship assistance that can provide short-term relief.

These continuing hardship programs may still allow you to temporarily defer or adjust your payments to make them more manageable. Some lenders, for example, still offer temporary interest-only payments on traditional loans if you continue to face financial difficulties and others offer line of credit increases. Although these programs may provide temporary relief, this does not mean that your debt is paid off or has been forgiven.

What is debt collection?

Debt collection occurs when a collection agency or company attempts to collect overdue debts from borrowers. You may be contacted by a debt collector if you haven’t made loan or credit card payments and those payments are seriously overdue.

If you co-signed a loan or are an authorized user on a credit card for someone else, you may also be contacted by a debt collection agency seeking payment for the money owed. These outstanding debts can be anything, including:

Collection agents are third-party companies that work on behalf of another company to collect debts. If a company works for the original creditor, the creditor pays the debt collector a percentage of the recovered debt. Sometimes debt collection agencies will buy back the original debt for pennies on the dollar after you haven’t repaid the debt to the original creditor – then sue you.

How does debt collection work?

Debt collection can vary depending on the company collecting a debt. Some agencies only handle a specific type of debt, such as medical debt or student loan debt. Others might be dealing with a debt that is a few years old. Others might not face the debt if it’s past the statute of limitations, which is different depending on where you live.

Collection agencies can come after an old debt as soon as it has been past due for a few months and indefinitely thereafter. It depends on the company collecting the debt, how much you owe, and what type of debt you have.

If you have outstanding debts, you are usually alerted by written notices and phone calls through your original creditor. For example, if you have an old student loan that you stopped paying, your lender will attempt to contact you to update the account. If he can’t get you to pay what you owe, he will eventually quit. This is usually when the transition from original creditor to debt collector occurs.

Debt collection agencies and collection agents will use the information on file to contact you. Your current address, your telephone number and even the contact details of your relatives are used. If they can, debt collectors will use personal banking information, including savings and investment accounts, to determine if you have the money to pay off a debt. Some states allow wage garnishment to collect old debts.

How Reputable Collectors Work

Although there are many agencies that use nefarious debt collection practices, most follow the rules and collect money from delinquent accounts in a professional manner.

Reputable debt collection agencies will send letters to the address you gave your creditor. If there is a way to see that you have moved, agencies may send letters to your new address in an attempt to collect a debt. Whether agencies send you letters or call you, they are required to give you specific details about your debt, including:

  • The name of the original creditor.
  • The amount you owe (including late fees and other charges).
  • Your ability to dispute the debt in question, with stipulations.

The collector should say you have 30 days to dispute the debt in writing. If you ask for the name and address of the original creditor, they must tell you. If you don’t dispute the debt within 30 days, the agency considers your debt valid and may continue to contact you to collect a debt.

Companies that follow the rules will work within the statute of limitations, depending on the type of debt you owe and where you live. They will only contact you between 8 a.m. and 9 p.m., although you may receive many calls in a day.

When collection agencies are functioning properly, you should not experience any harassment or threats. If a company says you’re going to be arrested, the police are coming, or someone is chasing you, they’re not acting legally.

Why the Fair Debt Collection Practices Act Matters

Due to the Fair Debt Collection Practices Act, or FDCPA, you as a consumer do not have to put up with harassment and threats from debt collectors. Some tactics that are not allowed include:

  • Impersonating a lawyer, law enforcement officer, or anyone other than a debt collector to get you paid.
  • Lying about debt, including misrepresenting where it came from or that you owe more than you owe.
  • Other deceptive or abusive practices, including threatening you with arrest.

If you are a victim of nefarious practices by a debt collector or someone claiming to be trying to collect a debt, you can contact government agencies to report them. Here’s how:

You can also sue a debt collector under the FDCPA for deceptive practices. If you win in federal court, the debt collector will pay your attorney’s fees and possibly damages.

How to handle collection debt

If your debt is in collection, this step-by-step guide can help you through the process.

  1. Confirm that the debt is yours. Debt collection agencies are required by the FDCPA to send you a debt validation letter before paying anything. This is a crucial step in the process as it confirms whether the debt is yours. A debt validation letter will also state the amount owed, the type of debt owed, creditor details, and other important information. If there are any errors, you have 30 days to dispute the debt.
  2. Explore your payment options. When it comes to paying off your debt, you will generally have two repayment options. You can either pay off your balance in a lump sum or with a repayment plan. The best option for you will depend on your budget and the amount of debt owed. Before deciding on a plan, calculate how much you can reasonably set aside. You may be able to negotiate a repayment plan for less than you owe, or you may choose to work with credit counseling or follow a debt management plan.
  3. Start making payments. Before you start making payments, contact your debt collector and ask for a written agreement. Once you have received the agreement and carefully checked the accuracy of the information, you can start making payments. After making your first payment, contact the collector to ensure it has been received and document each payment you make for your future recordings.

How does a collection debt affect your credit?

An unpaid debt in collections can have a major impact on your credit score. If you have an overdue account, your creditor may report it to the credit bureaus, which will lower your credit score.

Collections can stay on your credit file for up to seven years from the first overdue date. The impacts of this account should lessen over time. After seven years, the account should disappear from your credit report. If not, you can file a dispute with the credit bureau in question and have it removed.

There are, however, instances where debt collection will not impact your credit score. Earlier this year, the country’s three credit bureaus announced changes to medical debt reporting procedures.

As of July 1, medical collection debts that have been paid off will not appear on your credit report. This means that if you had a medical bill that was forwarded to a collection agency and was on your credit profile, it will be removed.

Additionally, there is now a longer grace period before which unpaid medical collection debt will be added to your report. The period has been reduced from six months to one year. The credit bureaus also announced that medical collection debt of $500 or less will no longer appear on credit reports.

The bottom line

Collecting an overdue debt is a legal way for creditors and debt collection agencies to get the money they are owed. If you’re behind on payments — or haven’t paid them at all — you owe the companies to repay that money. Otherwise, you could face a deluge of calls and letters from debt collectors trying to collect a debt.

But even if you owe money, you have the right not to be subjected to deceptive or abusive behavior by a debt collector. If someone is harassing you to collect a debt, you can act immediately. Contact federal agencies or your state attorney general to file a complaint.

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