Debt Consolidation

Debt Collection Agencies: What You Should Know

Debt collection agencies are companies that specialize in getting people to pay money that they owe. They are third parties that creditors often bring in if their efforts to collect payment fail.

While they don’t always have the best reputation, debt collection agencies play a vital role in the financial services industry. If companies didn’t have some way to collect on unpaid debts, they’d be far less likely to lend money.

In this debt collections guide, we will cover:

What is a debt collection agency?

A debt collection agency is a company that specializes in recovering past-due balances on personal debt, like credit cards, mortgages and medical debt. They come in at the end of a monthslong process that begins when you miss a payment.

Once the payment due date passes, the company you owe typically begins to email you and call you to try to arrange a payment that will get you caught up on the terms of the loan. After a certain period of time — usually around 180 days — your original creditor will generally try to cut their losses and move on. In some cases, they’ll sell the debt at a discount to a company that specializes in collecting money from delinquent borrowers, known as a debt collection agency.

Debt collection agencies are then able to legally attempt to collect the full amount owed, plus interest and fees. The difference between what the agency bought the account for and what they collect beyond what’s owed is the debt collection agency’s profit.

How debt collection agencies get consumers to repay debt

Debt collection agencies may call you or send you letters, emails or text messages to try to collect on the unpaid bill. They can negotiate a settlement with you, either through a lump-sum payment or series of monthly payments.

They can also sue you to collect on the debt. Courts may order your wages to be garnished to pay back your debt.

List of the largest debt collection agencies

About 8,300 debt collection agencies are active in the U.S., according to industry research firm IBISWorld. Here is a debt collection agency list featuring some of the most prominent companies you may encounter.

How to determine if a debt collection agency is legit

Debt collection scams are fairly common, so before you send any money to a company claiming to be collecting on debt that you owe, you need to make sure that you’re dealing with a legitimate agency.

Legitimate debt collection agencies are required to provide you with information including the name of the creditor and the amount owed. They must also inform you that you can dispute the debt. If they don’t tell you all that in their first phone call, they have to send you a letter within five days.

If you don’t recognize the debt and the company refuses to provide you with information about the debt being collected, they may be a scammer. Here are other signs of an illegitimate debt collection agency:

  • They pressure you to pay with a prepaid debit card or wire transfer.
  • They threaten to tell your family or employer about the unpaid debt.
  • They threaten you with jail time if you do not pay.
  • They ask you for sensitive information like your Social Security number or bank account number.
  • They refuse to provide contact information for their company.

Before agreeing to pay a debt, it’s good practice to contact your original creditor to make sure the debt collection agency is legitimate. You should also research the agency, matching up phone numbers and addresses provided to you with information at the company website, and details provided by your original creditor.

You should also look at your credit report to verify that the debt appears on it as the collection agency has stated. Once all that is done, you can contact the collection agency at a time that’s convenient for you, when you’re fully prepared for the conversation.

How the debt collection process works

  1. Debt collectors begin contacting you
  2. The agency offers a settlement
  3. The agency sues to collect payment
  4. The court rules

1. Debt collectors begin contacting you

They may try to get in touch with you by mail, phone, text message or email. If they’re having trouble reaching you, they may also contact neighbors, relatives or employers to find out your phone number of home address — though they are not permitted to discuss the debt with them.

2. The agency offers a settlement

The agency’s goal at this point is to get you to start making payments or negotiate a settlement of the debt. They may offer a total repayment that’s less than the original debt, with a portion forgiven. They may also agree to set up a monthly payment plan or accept a lump-sum payment.

3. The agency sues to collect payment

If the debt collection agency can’t reach an agreement with you, they may sue you to collect payment. You will have a limited amount of time to respond to the lawsuit with an answer that explains whether you agree with the statements made by the debt collector and mounts any defenses you have.

At this point, the debt collector will have to prove to the court that you owe the debt. If they do so, the debt collection agency will ask the judge to enter a judgment against you, and may also seek additional fees.

4. The court rules

If the debt collection agency can’t prove that you owe the debt, the court will rule that you are no longer legally responsible for it. If a judgment is entered, the debt collector then has additional legal tools to use to collect money. They may be able to garnish your wages or bank accounts, or put a lien against your property.

Your rights under the Fair Debt Collections Practices Act

Throughout this process, there is a strict set of rules that your debt collector must follow. It’s important that you hold them accountable to these rules.

Debt collection agencies must comply with the Fair Debt Collection Practices Act. This law covers mortgages, credit cards, medical debt and other forms of personal debt. It doesn’t cover agricultural or business loans, and it also doesn’t apply to the original lender — just collection agencies.

Your rights under the law include:

  • Debt collectors may not contact you at an inconvenient time or place. They can’t call you before 8 a.m. or after 9 p.m. unless you agree to it.
  • Debt collectors may not harass you.
  • If you request, debt collectors can be required to stop calling you and contact you through your attorney.
  • If you tell a debt collector in writing to stop contacting you, they must do so. However, they are able to notify you that they are stopping contact and they must notify you of any legal proceedings.
  • Debt collectors cannot lie to you or mislead you.

If you feel like the debt collection agency has violated any of these rules, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

How to deal with a debt collection agency

  1. Verify the validity of the debt
  2. Figure out how much you can afford to pay
  3. Consider negotiating a settlement

1. Verify the validity of the debt

Before doing anything else, you need to make sure that the debt collection agency is legitimate and the debt is valid. Send a debt validation letter to the collection agency that asks them to prove the debt is yours. This letter asks for an explanation of why you owe the debt, information on the original creditor owed, an itemized account of charges and fees and other documentation.

You should also check to make sure that the debt isn’t time-barred. States have laws that determine how many years agencies have to collect on a debt. After this point, this statute of limitations prevents a debt collector from successfully suing to collect the money. However, agencies may still contact you after the time limit is up, and it may still show up on your credit report.

At this point, you can dispute the debt if you do not feel it is valid.

2. Figure out how much you can afford to pay

If you are satisfied that the debt is yours and that you owe it, you need to determine how much you can realistically pay. Take into account your total monthly income and other bills. Decide on a total amount or monthly payment you feel comfortable making.

As you’re making this budget, prioritize all the debts you must pay. Keep in mind that home and auto loans are usually secured, meaning the creditor can repossess your car or foreclose on your house if you fail to make payments. These will have a higher priority than unsecured debt.

3. Consider negotiating a settlement

With that information in hand, you can speak with the debt collector and try to negotiate a settlement that’s in line with your budget. Discuss your financial situation with the agency and lay out your plan to see if it is acceptable to them. Make sure to get anything you agree upon in writing.

FAQs: Debt collection

What’s the difference between a debt collector and a creditor?
Your creditor is the company that originally lent you the money. For example, this could be a bank, credit card company or retailer. A debt collector is a third-party company that buys debt from creditors and then seeks to collect the unpaid balance.

What is debt collection arbitration?
Debt collection arbitration is a process less formal than going to court that some agencies use to settle a dispute over unpaid debt. Both sides will submit information to a neutral third party that will make a decision. These rulings are enforceable in court.

Can a debt collection agency garnish my wages?
Yes, a debt collection agency can garnish your wages — but only after obtaining a court order to do so. They will first have to convince a judge to grant a judgment against you. Most states have some exemptions and limits on wage garnishment.

What can I do if I feel a debt collector has broken the law?
You should start by filing a complaint to one of three agencies: the CFPB, the Federal Trade Commission and your state attorney general’s office. If they do not resolve the issue to your satisfaction, you can also sue the debt collection agency up to one year after the perceived violation.

You may be able to recover money for any damages you incurred. If you can’t prove any direct damages, you might be able to get $1,000 if you can prove they broke the law. However, this won’t get you out of paying the debt.

 

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