How Do Collection Agencies Work?

If you’ve ever had to deal with a collection agency, you are one lucky soul.

Sarcasm doesn’t always translate well over text, but hopefully, you caught the heavy sarcasm laced in that statement.

Let’s face it: collection agencies are the opposite of fun to deal with. In fact, their aggressive reputation alone is enough to scare a lot of consumers. When you receive a call from a collections agency, you may find yourself sitting on the other side of the phone breaking into a nervous sweat…or even worse. 😭

But why is it so unpleasant to deal with collection agencies? What are the repercussions—and how can you make it go away?

This is precisely what we’ll cover in this article.

What you’ll learn

• What is a Collection Agency?
• When Does a Debt Go to a Collection Agency?
• Types Of Collection Agencies
• How Do Collection Agencies Work?
• Your Rights with Debt Collectors
• What to Do When Your Debt Goes to Collections

What is a Collection Agency? 📖

The short and sweet answer is that a collection agency is a company that focuses on recovering an unpaid debt. In most cases, collection agencies are the middlemen. They are the go-between tasked with collecting debt for the original creditor.

This means the creditor still owns the debt, just that the collection agency is responsible for collection. Why do businesses and original creditors hire collection agencies? Simply because collection agencies are the professional bulldogs of debt recovery. They are notoriously way more persistent and oftentimes more successful than original creditors. 🦈

Original creditors usually hire third-party collection agencies as a last resort. This is because hiring a collections agency is expensive. The creditor pays the collector a percentage of the collected amount, usually 25% to 60%. 

But at this point, the original creditor only expects to receive a partial amount of the original debt. The longer a debt goes on unpaid, the smaller the chance of recovery. 

So in a creditor’s mind, receiving something is better than nothing.

When Does a Debt Go to a Collection Agency?

If you ignore letters and phone calls from the original creditor, you are at a high risk of being turned over to collections. And more than likely, you will know that your debt is being turned over to collections when it happens.

The process for collections can start as soon as 60 days past due but can drag out to 180 days past due. The time window depends on the type of debt and your creditor.

If you are left to face the music of a collection agency, know you aren’t alone. Many other consumers find themselves dealing with the beasts at collection agencies. In 2019 the Consumer Financial Protection Bureau (CFPB) reported that 1 in 4 American consumers (28%) have a debt that is in 3rd party collections. 😲

The high number of consumers with collections is indicative of one thing. Collection agencies are a business.

Types of Collection Agencies

Considering there are many different types of debts, there are also many different types of collection agencies. There are two main categories of collection agencies: Hired agencies and debt buyers.

Hired Collection Agencies

When struggling to collect a debt, creditors may decide to call in the professionals.

“The professionals” in this case are collection agencies. The creditors task the agency to collect an assigned debt. An assigned debt is the arrangement between the creditor and the hired collection agency.

Hired agencies are most common, and have been our focus up until this point because of that fact. There are also various types of hired collection agencies that tend to specialize in the types of debt they are to collect.

The specialties for these types of agencies range from age or amount of debt to even the industry of the original creditor.

For example, an agency that specializes in collecting newer debts may control the collection of debt less than 2 years old. There are also agencies that focus on the total amount of the debt. Some agencies only pursue larger amounts, while others pursue smaller amounts.

There are also collection agencies that specialize in collections for a specific industry. Health Care Collections, Retail Collections, and Bad Check Collections are a few examples.

Collection Agencies That Buy Debt

Debt buyers are different from standard hired collection agencies. In this case, the original creditor has given up on recouping the debt and made the decision to completely sell it to a buyer or agency. Sometimes the debt is a charge-off by the original creditor and then picked up by buyers. This is also known as “purchased debt.”

Debt buyers bid to buy bundles of debt for a ridiculously low price, usually pennies on the dollar. Debt buyers also expect to earn 3-6% of the balances they own. This means debt buyers are even more aggressive than standard third-party collections.

To spell that out: debt buyers oftentimes earn a commission. Just like a car salesman.

How Do Collection Agencies Work? ⚙️

The Federal Trade Commission (FTC) has set certain laws and guidelines to mandate how collection agencies are to operate. Acts like the Fair Debt Collection Practices Act exist to protect consumers and their rights.

The FDCA spells out that debt collectors are always to be fair, honest, and respectful. As you can guess, that doesn’t always happen. Dishonest collection agencies do exist, unfortunately.

Fun fact. The FTC receives more complaints about collection agencies/debt collectors than other industries. Hmm, wonder why.

If you, the debtor, request to dispute or verify the debt, collectors must honor your request. If you were a victim of identity theft and have a collection as a result, reputable collectors are required to make an effort to verify this.

Dishonest debt collectors might try to contact you about already paid debts. Additionally, this may also happen with time-barred debts (debts that fall under a statute of limitations.) Both of these are a sick attempt to try to collect more than you truly owe.

Another dishonest practice is having an account turned over to collections by the original creditor without you receiving any notice of an outstanding balance. This is also a violation from the original creditor.

Your Rights with Debt Collectors 👩‍⚖️

You as the debtor have rights and it’s super important to know those rights. 

The FDCPA requires debt collectors to:

• Call you during normal hours, between 8 am and 9 pm.
• Collection agencies are only supposed to reach out to you. This means they are not permitted to contact your friends or family.
• Additionally, if you have asked them not to call you at work or your employer doesn’t permit personal phone calls, they can not call you at work.
• Collection agencies can’t lie or pretend to be a government agency or lawyer. This goes back to the whole fair and honest thing.  They must at all times claim to be from a collections agency and clearly spell out which agency.
•  Agencies are not supposed to harass or threaten you with legal actions such as arrest. They aren’t allowed to use profanity or hate speech.
• Collection agencies aren’t allowed to publicize any debt you owe in order to intimidate you to pay up.

You also must be sent written notice, called a debt validation notice. The agency must mail this notice within 5 days of first contacting you. The notice must include the name of the collections agency and the agreement to proceed in payment.

Collection agencies are also prohibited to contact you by postcard. Mail correspondence must be in a sealed plain envelope for privacy reasons.

Lastly, some states define unfair practices as collecting interest, fees, or any other charge. The state you live in determines if this is an unfair practice. Which to be transparent with you, a lot of state laws do permit interest and fee accrual. 👎

These guidelines may seem simple, but every year debt collectors bend and blur the lines. Debt collectors are aggressively pushy because they have one goal: to recover debt. This is why sometimes they resort to breaking the law or violating the FDCPA.

It’s important to know that you can submit a complaint to the CFPB website or your state’s attorney general’s website in case of unfair practices.

What to Do When Your Debt Goes to Collections 💡

Now that you know the types of collections and the basis of their operations, you should be able to cope better when faced with collections.

When you have a debt go to collections, your credit score will tank. The debt collectors will bombard you with letters and phone calls. And lastly, you will also face an immense amount of stress.

So what do you do? First, learn your rights. We touched on the basics of what you need to know. However, regulations and laws vary from state to state. So the absolute best way to be as educated as possible is to visit your state attorney general’s website.

Next, make a plan to take on the collections, as soon as possible. It’s absolutely no fun to work with collection agencies, but the longer you wait, the more painful the process will be.

Remember their goal. Collection agencies want you to pay as much as possible as fast as possible. As debt collectors are human with emotions, they oftentimes can become pushy. Don’t allow yourself to get intimidated.

Negotiating with Collection Agencies 🤝

Lastly, consider negotiating a settlement. The damage is already done to your credit, so you might as well save some money. Negotiating an outright settlement gives you more negotiation power than setting up a payment plan. 

In negotiating your settlement, make sure to ask for the removal of the collection from your credit file. You can also write a pay for delete letter to give yourself a bigger edge.

With some deep breathing exercises, the business operations knowledge, and our tips, you can handle collection agencies like a pro.

About the author

Summer Nevins

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Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.