A collection agency is an organization that specializes in debt collection, the pursuing of payments or debts owed by businesses or individuals. When a debt is at least 60 days past due it is classified as a delinquent debt, thereby becoming eligible for collection from a debt collector. Some examples of delinquent bills that a collection agency might seek to recover are overdue payments on mortgages, phone bills, credit card balances, auto loan payments, student loans, etc. Once the outstanding balance is collected the debt collector is allotted a fee or percentage of the total amount owed.
There are first-party agencies and third-party agencies within the realm of debt collectors. First-party agencies are generally subsidiaries of the company the debt is owed to. This type of agency is more involved in the early stages of default and typically strives to maintain a cordial relationship with the customer or debtor. The term first-party indicates that they are an extension of the creditor (first party to the contract).
Third-party agencies are called such because they were not a party to the original contract. These collection agencies are separate companies contracted by the original creditor, acting as middlemen to collect debts on their behalf. Third-party agencies are hired in order to minimize the cost and resources of chasing after delinquent payments in-house. Collection agencies are valuable to creditors because they possess the tools needed to track down a debtor in order to collect the necessary receivables.
Legal Limitations for Collection Agencies
There are many tactics used by debt collectors to track a debtor or to intimidate them into remitting the amount owed. Some of these strategies include calling the debtor’s personal phone and/or place of employment. Legally, debt collectors can only call during the hours of 8 a.m. and 9 p.m. local time. They may call a debtor several times a day or even reach out to friends or neighbors to verify that they have the correct contact information. When collecting a debt, collectors are required to adhere to the Fair Debt Collection Practices Act (FDCPA). This puts restraints on their behavior, limiting the too often aggressive conduct of collection agencies and their reps.
For example, under the FDCPA a debt collector cannot call a debtor back to back several times, they cannot reach out to a debtor’s friend or neighbor more than once, and if they do make contact with any relations of the debtor they are legally unable to disclose the reason for trying to reach that person.
Collection agencies use other methods to force payment on what is due. They may send letters particularizing outstanding bills or even show up on a debtor’s front doorstep. Approaching an individual’s home may seem like an invasive overstep but under the FDCPA it is legal. If the debtor has succeeded in dodging a collector through all of these strategies, agencies will revert to private investigators. Collection agencies can also conduct searches for a debtor’s assets via bank and brokerage accounts in order to ascertain the debtor’s ability to repay. Collectors have leverage over their debtors as they can report negative data to the credit bureaus. Collection agencies may report delinquent debts, late payments and judgments to the credit bureaus, hoping debtors will realize the consequences and resolve the credit reporting issues.
Damage to your credit rating
A credit report contains monthly updates about an individual’s payment status, mainly in regards to credit cards, student loans, mortgage loans, automotive loans and leases, etc. If you go delinquent you pay the price through negative credit reporting. The original creditor typically takes about 6 months to update the status of the account within the credit report as “CHARGE OFF”. This gives the creditor and the debtor time to work a deal. Once the Charge Off status reports it typically means the creditor (company) has begun the process of writing off the debt as a loss, closing out the account, and selling the debt to a third party collection agency. When an account is sold to a collection agency or a collection agency is hired to collect a debt, more time is permitted for the new creditor and debtor to make a deal. If the debtor avoids the collection process, ultimately not paying the creditor (old or new) then the new holder of the debt may report a collection to the debtors’ credit reports. This type of negative update to the credit reports is detrimental to the credit scores because it shows that the debtor is unable to pay back their loans. Debt collection accounts lessen the probability of getting approved for any future credit cards or loans and can stay on an individual’s credit report for up to seven years.
The Debt Buyer
If a debt collector proves to be unsuccessful after a certain amount of time, discouraged creditors may wish to sell the debt. In this scenario the creditor would assemble a package of delinquent accounts and sell it to a debt buyer for a small percentage of the debt value. Once the debt buyer owns the new accounts they may pursue the debtor for the full balance due, including any interest that has accrued under the terms of the original contract.
An example of this would be; if a creditor with $50,000 in bad debt sells to a debt buyer (third party collector), the buyer would purchase the debt for pennies on the dollar. The debt buyer aka new creditor aka collection agency subsequently pursues the debtor in an aim to recover the entre $50,000 debt. Debt buyers sometimes hire an outside collection agency or collection law firm on a contingency basis to locate the debtor and retrieve the debt. They are classified as active if they are themselves pursuing the debt and termed passive if they hire an outside agency.
Verifying Debt
The CFPB has reported that one of the top collection agency complaints comes from individuals who have debt collectors trying to collect a debt from the wrong person. As a debtor/consumer you have rights. Demand that the collector prove the debt exists and that they have the right to collect it from you. Some documentation from the original creditor needs to be offered showing that they properly obtained the debt and can in fact take action to collect the debt. Most collectors will send, by mail, letters breaking down the account information and settlement offers, which can include a range of repayment options. There is a time constraint placed on the ability to exercise the collection right, so the validation request needs to be sent as soon as the collector contacts you.
Debt Settlement
Settling debts is common practice within America’s marketplace. It is crucial to eliminate red flags from existing within credit reports. Any negative item or bad debt can be deemed a red flag by automated and manual underwriting systems. If a bad debt is deemed verified then the next logical step is to settle the debt for as cheap as possible. In doing so the debtor/consumer eliminates the risk of lingering negative information, debts changing hands and newly reported negative information. By obtaining paper work from the creditor, analyzing their offer, then negotiating a settlement, debtors are often able to move on from the debt problem at a discounted rate. It is a consumer’s sole responsibility to prepare their credit for maximum potential, especially for transactions. The Credit World platform helps consumers control their credit world and improve the quality of their credit related transactions.