Debt Collector: Definition, Collection Strategies, Regulations

What Is a Debt Collector?

A debt collector is a person or organization that is in the business of recovering money owed on delinquent accounts. Many debt collectors are hired by companies to which money is owed by individuals, operating for a flat fee or for a percentage of the amount they are able to collect. Some debt collectors are debt buyers; these companies purchase debt at a fraction of its face value and then attempt to recover the full amount of the debt or as much of it as they can. A debt collector may also be known as a collection agency. Here is how they work.

Key Takeaways

  • A debt collector attempts to recover past-due debts owed to creditors.
  • Debt collectors are often paid a percentage of any money they manage to collect.
  • Some debt collectors purchase delinquent debts from creditors at a discount and then seek to collect on their own.
  • Debt collection is regulated in order to protect consumers from aggressive collectors, although abuses still occur.
  • Debt collectors who violate the rules can be sued.

How To Confront A Debt Collector

How Debt Collectors Work

When a borrower defaults on a debt (meaning that they have failed to make one or more required payments), the lender or creditor may turn their account over to a debt collector or collections agency. At that point the debt is said to have gone to collections.

This typically happens within three to six months of default, depending on how lenient the creditor is. Overdue payments on credit card balances, phone bills, auto loans, utility bills, and back taxes are examples of the delinquent debts that a collector may be tasked with retrieving.

Some companies have their own debt collection departments. But most find it easier to hire a debt collector to go after unpaid debts than to chase the clients themselves. Debt collectors also have the experience, tools, and resources needed to track down a debtor who might have moved to another address or changed phone numbers.

Debt collectors may call the person's personal and work phones, and even show up on their doorstep. They may also contact their family, friends, and neighbors in order to confirm the contact information that they have on file for the individual. (However, they are not allowed to disclose the reason they are trying to reach them.) In addition, they may mail the debtor late payment notices.

If the person agrees to pay the debt, the creditor will usually pay the debt collector a percentage of the money it gets back, unless they have a flat-fee arrangement.

Some debt collection agencies and other companies will purchase delinquent debt from creditors, typically for pennies on the dollar, then attempt to collect the debt for their own benefit.

Regulations and Consumer Protections

Debt collectors are regulated under the Fair Debt Collection Practices Act (FDCPA) administered by the Federal Trade Commission (FTC). The law, which went into effect in 1978, prohibits debt collectors from using abusive, unfair, or deceptive practices during the collection process. For instance, they are not allowed to contact debtors before 8 a.m. or after 9 p.m. Nor can they falsely claim that a debtor will be arrested if they fail to pay. Additionally, a collector can't physically harm or threaten a debtor and isn't allowed to seize assets without the approval of a court.

The law also gives debtors certain rights. For example, if they send a letter to a debt collector telling them to stop contacting them, the collector is required to comply.

In 2021, the Consumer Financial Protection Bureau (CFPB) issued a new Debt Collection Rule further clarifying what debt collectors are and aren't allowed to do. For example, when a debt collector makes its first contact with the debtor, either in writing or electronically, it must provide certain information, such as the debt collector's name and address, the name of the creditor, any account number associated with the debt, and the amount and itemized accounting of the debt. They must also provide information on the debtor's rights and how they can dispute the debt if they believe it is inaccurate.

People who think a debt collector has broken the law can report them to the FTC, the CFPB, and their state attorney general's office. They also have the right to sue the debt collector in state or federal court.

Do Debt Collectors Report Information to Credit Bureaus?

Yes, a debt collector may report a debt to the credit bureaus, but only after it has contacted the debtor about it. The delinquent debt may also be reflected on the person's credit report under the name of the original creditor. Both can remain on credit reports for up to seven years and have a negative effect on the individual's credit score, a large portion of which is based on their payment history.

Does the Fair Debt Collection Practices Act Cover Business Debts?

No, the Fair Debt Collection Practices Act applies only to consumer debts, such as mortgages, credit cards, car loans, student loans, and medical bills.

Does the Internal Revenue Service Use Debt Collectors?

Yes, the Internal Revenue Service (IRS) uses private agencies to collect outstanding tax debts in some instances. When that happens, the IRS will send the taxpayer an official notice called a CP40. Because scams are common, taxpayers should be wary of anyone purporting to be working on behalf of the IRS and check with the IRS to make sure.

Are Debt Collectors Licensed?

That depends on the state. Some states have licensing requirements for debt collectors, while others do not. All debt collectors in the U.S., whether licensed or not, must comply with the federal Fair Debt Collection Practices Act, and some states have their own laws in addition.

The Bottom Line

Debt collectors provide a useful service to lenders and other creditors that want to recover all or part of money that is owed to them. At the same time, the law provides certain consumer protections to keep debt collectors from becoming too aggressive or abusive.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Trade Commission. "Debt Collection."

  2. Federal Trade Commission. "Debt Collection FAQs."

  3. Consumer Financial Protection Bureau. "How Do I Get a Debt Collector to Stop Contacting Me?"

  4. Consumer Financial Protection Bureau. "Understand How the CFPB's Debt Collection Rule Impacts You."

  5. Consumer Financial Protection Bureau. "When Can a Debt Collector Report My Debt to a Credit Reporting Company?"

  6. Internal Revenue Service. "Private Debt Collection."