What Is a Collection Agency?

A collection agency is a company used by lenders or creditors to recover funds that are past due, or from accounts that are in default. Often, a creditor will hire a collection agency after it has made multiple failed attempts to collect its receivables. A lender may outsource the debt-collection activity to a third party (the collection agency), or it may have an internal department or a debt-collection subsidiary that would handle the job.

Key Takeaways

  • A collection agency is a company that lenders use to recover funds that are past due or from accounts that are in default.
  • Collection agencies work closely with the credit bureaus and lenders to try to retrieve delinquent 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 delinquency to a credit bureau. Then, not only will the borrower's credit history be tarnished, but also their debt will be turned over to a collection agency within three-to-six months of default.

When a Borrower Pays

If the borrower pays their debt as a result of the collection agency's efforts, then the creditor pays the collection agency a percentage of the funds, or assets, that it recovers. Depending on the original agreement entered into with the creditor, the debtor may have to pay the full debt all at once or a portion of it at a time.

When a Borrower Does Not Pay

If the borrower still will not, or cannot cover their arrearage, the collection agency can update the borrower’s credit report with a "collection" status, which leads to a drop in the individual’s credit score. A low credit score can affect a person's chances of obtaining a loan in the long term, as an account under debt collection can remain on their credit report for seven years.

Collection agencies deploy multiple strategies to try to retrieve funds, such as the following:

  • Calling the debtor’s personal and office telephones
  • Mailing numerous late-payment notices to the debtor
  • Contacting a debtor’s family, friends, and neighbors to confirm the debtor’s contact information
  • Appearing at the individual’s front door

Debt Collection Agency Regulations

Third-party collection agencies—but not creditors' in-house collection departments—are bound by the Fair Debt Collection Practices Act (FDCPA), of which some rules are cited below.

A debt collector may not do the following:

  • Proceed to collect an old debt that has been charged off as "uncollectible"—the debtor has either filed for bankruptcy or cannot be located
  • Sue or threaten to sue a borrower because of their debt
  • Legally seize assets from a debtor—unless the collection agency has won a lawsuit against a debtor
  • Physically harm or threaten to harm a debtor in an attempt to extract a payment
  • Contact an individual at work if they have explicitly stated that their employer does not approve of such calls

A debt collector may, however, do the following:

  • Attempt to collect a debt on which the statute of limitations—usually between four and six years from the first day of default—has run out
  • Call an individual between 8 a.m. and 9 p.m. only
  • Contact the debtor’s employer about overdue child support and alimony, federal student loans, or taxes