If you’ve been contacted by a debt collector for the first time, or you’re worried that a collector will contact you because you’ve fallen behind on your bills, you probably have many questions and are understandably nervous about the process.
This article will introduce you to the debt collection business so you can understand the collection agency’s perspective. This should give you a better idea of what motivates debt collectors and what their incentives are, which can help smooth your interactions with them and make the process less stressful.
- Debt collectors may work independently or for debt-collection agencies, and some are also attorneys.
- Debt collectors get paid when they recover a delinquent debt.
- Some collection agencies negotiate settlements with consumers for less than the amount owed.
- In the wake of the COVID-19 pandemic additional federal, state, and local rules have been put in place to protect consumers faced with debt problems.
How Does Debt Collection Work?
Debt collectors often work for debt-collection agencies, though some operate independently. Some, are also attorneys. Sometimes these agencies act as middlemen, collecting customers’ delinquent debts—debts that are at least 60 days past due—and remitting them to the original creditor. The creditor pays the collector a percentage, typically between 25% to 50% of the amount collected. Debt collection agencies collect delinquent debts of all types: credit card, medical, automobile loans, personal loans, business, student loans, and even unpaid utility and cell phone bills.
Collection agencies tend to specialize in the types of debt they collect. For example, an agency might collect only delinquent debts of at least $200 that are less than two years old. A reputable agency will also limit its work to collecting debts that are within the statute of limitations, which varies by state. Being within the statute of limitations means that the debt is not too old and the creditor still can pursue it legally.
For difficult-to-collect debts, some collection agencies also negotiate settlements with consumers for less than the amount owed. Debt collectors may also refer cases to lawyers who file lawsuits against customers who have refused to pay the collection agency.
Agencies That Buy Debt
When the original creditor determines that it is unlikely to collect, it will cut its losses by selling that debt to a debt buyer. Creditors package numerous accounts together with similar features and sell them as a group. Debt buyers can choose from packages that:
- Are relatively new, with no other third-party collection activity
- Very old accounts that other collectors have failed to collect on
- Accounts that fall somewhere in between
Debt buyers often purchase these packages through a bidding process, paying on average four cents for every $1 of debt face value. In other words, a debt buyer might pay $40 to purchase a delinquent account that has a balance owed of $1,000. The older the debt, the less it costs, since it is less likely to be collectible.
The type of debt also influences the price. For instance, mortgage debt is worth more, while utility debt is worth significantly less. Debt buyers keep everything they collect. Because they took the risk of purchasing the debt from the original creditor (and paying in advance to the original creditor), this debt becomes their own and any amounts collected are theirs.
Debt collectors get paid when they recover delinquent debt. The more they recover, the more they earn. Old debt that is past the statute of limitations or is otherwise deemed uncollectable is bought for pennies on the dollar, potentially making collectors big profits.
What Debt Collectors Do
Debt collectors use letters and phone calls to contact delinquent borrowers and try to convince them to repay what they owe. When debt collectors can’t reach the debtor with the contact information provided by the original creditor, they look further, using computer software and private investigators. They can also conduct searches for a debtor’s assets, such as bank and brokerage accounts, to determine a debtor’s ability to repay. Collectors may report delinquent debts to credit bureaus to encourage consumers to pay, since delinquent debts can do serious damage to a consumer’s credit score.
Debt collectors use letters and phone calls to contact delinquent borrowers and try to convince them to repay what they owe.
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 a judgment is obtained. This means the court orders a debtor to repay a certain amount to a particular creditor. To do this, a collection agency must take the debtor to court before the statute of limitations runs out and win a judgment against them. This judgment allows a collector to begin garnishing wages and bank accounts, but the collector must still contact the debtor's employer and bank to request the money.
Debt collectors also contact delinquent borrowers who already have judgments against them. Even when a creditor wins a judgment, it can be difficult 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.
How Reputable Collectors Operate
Debt collectors have a bad reputation for harassing consumers. The Federal Trade Commission (FTC) receives more complaints about debt collectors and debt buyers than any other single industry. The Fair Debt Collection Practices Act limits how collection agencies can collect a debt in order to keep them from being abusive, unfair, and deceptive, and there are debt collectors who are careful not to violate consumer protection laws.
Here’s what you can expect from a reputable collector.
A collector who behaves properly will be fair, respectful, honest, and law-abiding. After you make a written request for verification of the debt you've been contacted about—which is your legal right—the collector will suspend collection activities and send you a written notice of the amount owed, the company you owe it to, and how to pay. If the collector can’t verify the debt, the company will stop trying to collect it from you. It will also tell the credit bureaus that the item is disputed or request that it be removed from your credit report. If the collector works as a middleman for a creditor and doesn’t own your debt, it will notify the creditor that it stopped collection activity because it couldn’t verify the debt.
Collectors must also follow certain time limits, such as not reporting a debt that is more than seven years old and sending a debt validation letter within five days of the first contact with the debtor.
Reputable debt collectors will try to obtain accurate and complete records so they don’t pursue people who don’t really owe money. If you tell them the debt was caused by identity theft, they will make a reasonable effort to verify your claim. They also won’t try to sue you for debts that are beyond the statute of limitations.
They will not harass or threaten you or treat you differently because of your race, sex, age, or other characteristics. They will not publicize any debt you owe or try to deceive you in order to collect a debt, nor will they pretend to be law enforcement agents or threaten you with arrest. They also won’t contact you before 8:00 a.m. or after 9:00 p.m. without your permission to do so.
COVID-19 Debt Protections and Extensions
Federal, state, and local rules were put in place to protect consumers facing debt problems in response to the COVID-19 pandemic. Originally, section 4022 of the CARES Act provided foreclosure protection until May 17, 2020, for people with federally-backed mortgages. These homeowners could request forbearance of up to 180 days with an up-to-180-day extension. This effectively stops foreclosure since forbearance is a form of loss mitigation that prevents foreclosure so long as you comply with the agreement.
The CARES Act also originally offered forbearance protection to owners of government-backed multifamily properties and eviction protection for their tenants. Until July 25, 2020, additional eviction protection applied to anyone living in federally backed housing.
Those provisions were originally extended by President Joe Biden after he signed an executive order on his first day of office. The Biden administration extended the freeze on foreclosures and evictions until March 31, 2021. In an effort to continue helping homeowners during the pandemic, President Joe Biden extended this moratorium again until June 30, 2021. This includes anyone with a government enterprise-backed mortgage such as those backed by the U.S. Department of Agriculture (USDA) and the Federal Housing Administration (FHA).
Other debt-related relief under the Act includes administrative forbearance for federal student loan borrowers, protection for stimulus payment recipients, Chapter 13 bankruptcy procedures, credit reporting limits, and enhanced unemployment insurance benefits.
Consumers can also find programs, including at the state and local level, that offer coronavirus debt protection. One example is this Cease Debt Collection Communication letter from New York City. These programs and the helpful information they offer are not always easy to track down. Fortunately, the National Consumer Law Center has a document listing federal and state-by-state COVID-19 protections in a variety of categories including:
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act
- Federal foreclosure and eviction suspensions; mortgage loan forbearance
- Banking agency guidance on mortgage servicing and loan modifications
- State limitations on foreclosures and evictions
- Federal changes regarding appraisals
- Student loans, other debts owed to the government
- State actions regarding utilities and telecommunications
- State limits on collection lawsuits, debt collection, and repossessions
- Price gouging
- Collection of civil and criminal debt owed to the state
- Banking and bank-extended consumer credit
- Bankruptcy changes
- Fair credit reporting
- Stopping automatic bank account payments
- Insurance premiums
- Health insurance coverage/limits on surprise billing
- CARES Act employee protections
- Advice and assistance for consumers
To access this information visit: Major Consumer Protections Announced in Response to COVID-19
The Bottom Line
Debt collection is a legitimate business. If a debt collector contacts you, it’s not necessarily the beginning of an abusive relationship. Many collectors are honest people who are just trying to do their jobs and will work with you to create a plan to help you repay your debt, whether that means a payment in full, a series of monthly payments, or even a reduced settlement.
You should, of course, put up your guard when a collector contacts you, and you should know your rights and understand what debt collectors are and aren't allowed to do. But if you know a bit about how the business works, you might be able to resolve your delinquent debt amicably.
Follow these rules—and know your rights—to achieve the best possible outcome for your situation.