What Is Debt Collection Agency & How Do They Work?

Debt is a massive issue in this age where nearly everyone has some sort of debt that they have to pay every month.

Sometimes, these debts go unpaid due to the nature of our lives, and we fall back on our payments. At that point, debt collection comes into play from your debtors.

And according to Bills.com, about 26% of people in the US have some kind of debt in collections.

What Is Debt Collection Agency

So when it comes to debt and debt collection, there are many different methods that creditors use to collect their debt; sometimes they come to you directly, sometimes they go through a lawyer, and sometimes they go to a debt collection agency.

Most debt collectors work for debt collection agencies, so it makes it easier for people to go to them to collect their debt. We will examine debt collection agencies in this article.

Read: What Is Debt Financing? 

Key Takeaways

  • Some agencies could only deal with unsecured debts higher than $1000 or such.
  • To collect debt, debtors may try to threaten the debtor’s credit score or something similar.
  • According to The FDCPA, debt collection companies are not allowed to use abusive, unfair, or deceptive practices to collect debts from anyone.

What Is Debt Collection Agency?

What Is Debt Collection Agency

A debt collection agency is an agency that specializes in collecting debts and generally has a specific niche in which they have massive experience.

It means that some agencies could only deal with unsecured debts higher than $1000 or such.

When a creditor works with a debt collection agency, they typically get a certain commission from the debt they collect.

This means you actually don’t pay them upfront; you bet on them doing their job correctly.

Debt collection agencies either collect the full amount or go for settlements where they pay less than the amount they owe, but they give cash directly. 1

How Does a Debt Collection Agency Work?

How Does a Debt Collection Agency Work

There are many different ways debt collection agencies try to collect the debts and since contacting the debtor is actually a hefty job where you need to be extremely careful about what you can say, how you can contact them, and other legality issues, debt collection agencies takes extreme care with that.

They generally either send a letter or make a phone call to the debtors to convince them to repay their loan.

However, not every day can the agencies reach out to the debtor with the contact information the creditor provided them.

When that happens, they go and search about them and find a way to contact them.

This is a lengthy process and could be problematic depending on how tough the debtor is.

Sometimes, agencies search for the debtor’s assets and let credit bureaus know about the details of these debts, and since this affects the credit score, the debtor might be willing to come to an agreement. 2

Read: What Is Sleep Debt

What Can A Debt Collection Agency Do?

What Can A Debt Collection Agency Do

A debt collection agency buys debt from creditors to recover delinquent debts.

Some companies have their own in-house debt collectors, and some hire third-party debt collectors.

Upon the successful collection of the debt, the creditor pays the collection agency 25-50% of the debt recovered as commission or their fees.

Debt collectors recover various types of debt, including credit card debt, student loans, personal loans, etc.

Types Of Credit Collectors

There are two types of third-party credit collectors:

  • Agencies that collect on a creditor’s behalf.
  • The agencies that purchase the debt from the lender.
  • These agencies collect the payments in exchange for a percentage of the money they collect, typically 25% to 50%. 

These agencies buy the debt from the lender and only make money when they collect a debt.

What To Do If A Debt Goes Into Collection?

What To Do If A Debt Goes Into Collection

If your debt stays outstanding for a long time, then your creditor may decide to sell your debt to a debt collection agency.

Here’s what you can do if your debt goes into a collection:

  • Confirm the debt: Before asking for payment, the debt collection agency is required to send you a written notice called a debt validation letter within 5 days from the initial contact. This letter includes details about the debt, including the amount you owe, the type of debt, name of original creditor, and other details. If you do not owe any debt or find any other errors, then you can dispute the debt within 30 days.
  • Choose your payment method: If you do owe the debt, then you would have to pay the debt to the collection agency. For this, you typically have two options: either pay in monthly installments or in a lump sum. You can also try negotiating for less than what you owe or choose to work with a credit counselor, or go for a debt management plan.
  • Start paying: Once you have decided how you are going to pay the debt collector, reach out to them and ask them to send you a written agreement with all the details. Double-check each and everything in the agreement, and if everything is correct, then start making payments.

The Importance Of Fair Debt Collection Practices Act

Importance Of Fair Debt Collection Practices Act

According to the Fair Debt Collection Practices Act, the debt collection agency cannot harass or threaten you. As per FDCPA, the debt collection agency cannot:

  • Lie about debt or can make false claims related to it.
  • Abuse, harass, or threaten you.
  • Pretend to be law enforcement or attorney or anyone else to threaten you to make you pay.
  • Insult you in front of others.
  • Call you at your work place or at inconvinient times.

If a debt collection agency is doing the afore-mentioned things with you or if someone is falsely pretending to be a debt collector, then you can file a complaint with:

  • Consumer Financial Protection Bureau
  • Attorney general
  • Federal Trade Commission

You can even sue a debt collector if they are carrying out deceptive practices, and if you win, they would have to pay your attorney fees and other penalties. 3

Can Debt In Collections Damage My Credit Score?

Can Debt In Collections Damage My Credit Score

Yes, if your unpaid debt goes into collection, then it can damage your credit score greatly.

This happens because your creditor will report your delinquent account to the credit bureau, and this will result in a drop in your credit score.

Also, collections remain on your credit report for up to seven years. After seven years, this information is dropped off from your credit report.

And if you find the information on your credit report even after seven years, you can dispute it and get it removed.

And as for medical debts, the three credit bureaus have made some changes regarding their reporting procedure.

So if your medical debt was shown in your credit report, and you have paid it off then the medical bill will be removed from your credit report.

Also, unpaid medical bill collection will be added to your credit report after a year instead of six months now. 4

Benefits Of Hiring A Credit Collection Firm

Here are some benefits of hiring a credit collection firm:

  • Legal security

Customers are very well informed these days and will not hesitate to sue if their rights are violated.

Credit collection agencies are well-aware of all the laws and the technicalities involved allowing them to eliminate the legal risks involved in collecting the debts on their own.

  • Documentation

Debt collection firms keep a complete record of their interaction with the debtors, so if you want to sue the debtor in the future, you will have a complete record of each time you attempt to contact the debtor to prove in court how much effort you have put in the to recover the debt.

  • Guaranteed Debt Recovery

Hiring a credit collection firm will increase your chances of successfully collecting your unpaid debts.

They are more experienced in communicating with the debtors and know the best techniques to make the debtors pay back their debt. 

Note: Consider hiring a debt relief company if the credit collection firm is using unauthorized methods to communicate or recover debts. 5

The Verdict

To conclude, debt collection agencies are agencies to help creditors to collect their debt from the debtors they owe.

Debt collection agencies take over the entire process and make sure that the debtor pays the amount they owe or at least an amount that will satisfy the creditor.

They do this by using different means such as searching the debtor and their assets, trying to contact them, or coming to an agreement about the debt.

They sometimes use ways that would threaten the debtor’s credit score or similar techniques to get the debt resolved faster than it normally would have.

Note: According to The FDCPA, debt collection companies are not allowed to use abusive, unfair, or deceptive practices to collect debts from anyone.

If you’re facing any such issue consider hiring a debt relief company for debt management.


Can a debt collector call my friends or relatives?

A debt collector can only call your relatives or friends to locate you and ask them only for your number or address.

However, they cannot call them more than once and cannot discuss your debt with them legally.

They are allowed to discuss their debt only with their spouse or with their parents if they are a minor. 6

Can a debt collector take me to court?

Yes, a debt collector can sue you and take you to court to recover the money you owe to them.

If they sue you, it is important that you appear in court and do not ignore it; otherwise, the court might announce a decision in their favor.

Can debt collectors garnish your wages?

Yes, debt collectors can garnish your wages but only after the court’s judgment.

Also, there are laws as to how much money they can garnish. This differs from state to state. 7

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  1. https://www.equifax.com/personal/education/debt-management/what-can-collection-agencies-do/#:~:text=Collection%20agencies%20are%20companies%20that,handle%20collections%20on%20their%20behalf.[]
  2. https://www.investopedia.com/articles/personal-finance/121514/how-debt-collection-agency-business-works.asp[]
  3. https://www.bankrate.com/personal-finance/debt/what-is-debt-collection/[]
  4. https://www.creditkarma.com/advice/i/accounts-in-collections#:~:text=Unfortunately%2C%20a%20debt%20in%20collections,impact%20on%20your%20credit%20scores.[]
  5. https://www.neuanalytics.com/blog/how-do-collection-agencies-work[]
  6. https://www.consumerfinance.gov/ask-cfpb/can-debt-collectors-tell-other-people-like-family-friends-or-my-employer-about-my-debt-en-332/#:~:text=AUG%2024%2C%202022-,Can%20debt%20collectors%20tell%20other%20people%2C%20like%20family%2C%20friends%2C,out%20how%20to%20contact%20you.[]
  7. https://www.nolo.com/legal-encyclopedia/who-can-garnish-my-wages.html[]
  8. https://www.consumerfinance.gov/ask-cfpb/can-debt-collectors-tell-other-people-like-family-friends-or-my-employer-about-my-debt-en-332/#:~:text=AUG%2024%2C%202022-,Can%20debt%20collectors%20tell%20other%20people%2C%20like%20family%2C%20friends%2C,out%20how%20to%20contact%20you.[]
  9. https://www.nolo.com/legal-encyclopedia/who-can-garnish-my-wages.html[]

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