Collection Agency FAQ
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What is a collection agency?
There are two possibilities.
Some creditors will actually use a separate company name, address, and
phone number for their internal collection departments, in order to give
the impression of an "outside" agency, on the theory that debtors will
take it more seriously. This strategy is generally only used when the
debt is recent (under six months delinquent.)
However, most collections activity is performed by third-party collection
agencies, which are separate from the original creditors, and "work" debts
on behalf of various lenders. They may also buy bad debts which have been
designated as charge-offs by the original
This FAQ focuses on third-party agencies.
How do they make money?
Third-party collection agencies often work on commission, where they
receive a percentage of the amount that they collect. Individual collectors
are often paid a low base wage plus commissions based on their personal
Some agencies also purchase large groups of charged-off bad debts for
a small percentage of the "face value" (amount owed.) After a debt is
sold, the debtor now owes the full amount to the purchaser. Since the
chances of recovery decrease substantially with time, an agency might
only pay 1% - 5% of face value. The agencies' profits come from the difference
between the purchase price and the amounts that are eventually collected.
How do they work?
The primary tools of a collection agency are letters and telephone calls.
What are the letters like?
The letters are computer-generated, and are often in a standardized series
which starts with a friendly, "reminder" tone, and may progress to ultimatums.
The letters are pre-written and sent to many debtors; they are not
The first letter must state that the recipient has the right to dispute
the validity of the debt (in writing), and the agency must send some confirmation
after verifying it with the original creditor. Collection letters must
also contain the statement that they come from a debt collector, and that
any information gathered will be used for the purpose of collecting the
debt. Collectors are legally prohibited from printing anything on the
outside of the envelope which indicates or suggests the nature of the
communication. Even the return address must be discreet, so many agencies
will just use their company's initials, or some other nondescript name.
The debtor's reaction to the letters will affect which letters the agency
will select from its repertoire. Cooperation (e.g. making payment arrangements
and/or partial payments) may result in letters with a gentler tone. Evasive
or hostile reactions from the debtor may result in a more threatening
Collectors try to create a sense of urgency, in order the collect within
the shortest amount of time, and to encourage the debtor to prioritize
that particular obligation. Deadlines may be set, such as, "Pay this amount
within ten days." There may also be threats, such as, "...Or we will proceed
to further collection action." But most of the time, if a debtor fails
to meet the deadline, all that will happen is that yet another form letter
will arrive, making the same basic demand. The "further collection action"
usually just means more form letters.
Collection letters will always encourage the debtor to call the collection
agency on the phone. If the debtor doesn't call, then a collector will
often call the debtor.
What are the phone calls like?
Individual telephone collectors may be assigned a group of accounts,
and spend their entire workday, every day, calling them. Their enthusiasm
is fueled by frequent performance evaluations and personal commission
payments. The size of a collector's own paycheck is dependent upon how
much money s/he extracts from debtors. Between that factor, and the relentless
confrontations, this is a very high-stress job, with high employee turnover.
If a collector calls and reaches someone other than the debtor (e.g.
a roommate), s/he is legally prohibited from disclosing the reason for
the call. Depending on the state, this may or may not include the debtor's
spouse. If the collector reaches an answering machine or voice mail, s/he
will often leave a message, but is prohibited from explaining the reason
for the call, since someone besides the debtor might hear it. The standard
message goes something like, "I am calling for John Smith. It is very
important that you call me back. My name is Joe Schmo, and my number is
1 (800) 234-5678." S/he will typically sound rather bored and stilted,
with other voices chattering in the background. Collection agencies are
required to provide a phone number which is free for the debtor to call.
They also may attach their (800) numbers to equipment which instantly
identifies and logs the phone number which a debtor is calling from, in
order to call the debtor at that number later.
When speaking with a debtor, many collectors (especially those without
much experience) will use a script, which contains a pre-written introduction,
request for payment, and has various branches to follow, depending on
how the debtor responds. If a particular debtor is taking up too much
time, without making arrangements to pay, the collector will be inclined
to move on to other accounts.
Any information that the debtor gives about his/her financial situation
(e.g. income or job status, etc.) will be noted on the account record
and used to estimate the chances of a recovery, the appropriateness of
legal action, and so forth.
But what can they actually DO?
If they are working the debt on commission, they can send some more form
letters and make some more scripted phone calls.
They can also report the item to the credit bureaus. And if they are
working on commission, they can recommend a lawsuit, or if they own the
debt, they can sue. However, the actual chances or intentions of this
are often significantly less than they try to suggest to the debtor.
Collection agencies can not legally seize a debtor's assets, bank
accounts, or paycheck unless there has already been a successful lawsuit
with a judgement awarded to them.
Collection agencies can not legally make any kind of public announcements
or disclosures concerning the debt, except to the credit bureaus.
Collection agencies can not legally get a debtor fired from his/her
Collection agencies can not legally engage in any type
of physical violence or threats thereof.
Why does the debtor pay?
Often, the reasons include fear, guilt, intimidation, and a lack of understanding
of the legal situation.
The debtor may feel guilty and ashamed of being a "deadbeat,"
and may perceive a judgement of his/her value as a person.
The debtor may have greatly exaggerated ideas about what collectors are
(legally) capable of doing, and may have outdated stereotypes in mind.
The debtor may be intimidated by the relentless, confidant demands, from
companies that may seem so powerful. S/he may take it personally, and
assume that great individual attention is being given to this particular
Consumers being contacted by collection agencies are typically in serious
financial difficulty, and under emotional stress about the general
situation, so they may be confused and vulnerable.
Many debtors aren't aware of their legal rights, and feel powerless.
There are two main things that a collection agency can actually do that
a debtor should be concerned about. These involve damage to credit reports,
and the smaller possibility of a lawsuit.
What about credit reports?
Third-party collection agencies may report a debt to one or more of the
credit bureaus, as a "Collection
Account," including the amount, and whether it was paid or not. Paying
off a collection account will not result in the item being removed
from the consumer's credit reports - it will simply be marked "Paid."
Agencies can report both debts that they have bought, and also debts that
they are working on behalf of the actual creditor.
Also, a collection agency may request a debtor's credit report, in order
to get an idea of his/her general financial situation, and to get an updated
address and phone number.
How long do collection accounts last?
Collection accounts are subject to the normal seven-year time limit for
appearing on credit reports. As specified in Section
605 of the Fair Credit Reporting Act, this time limit is based on
the date of the original delinquency.
What are the chances of a lawsuit?
If the debt still belongs to the original creditor, a third-party collection
agency cannot file a lawsuit. But if the balance is large, the debtor
is being resistant, and if there are indications that the debtor has vulnerable
assets, the agency may send the account back to the creditor with a recommendation
to sue. Each creditor has its own criteria for the decision; for example,
the amount must be substantial (often $1500 or more, at the very least.)
Collection agencies tend to avoid sending too many accounts back, since
it suggests that they aren't very good at collecting. Also, letters and
phone calls are much less expensive than going to court.
If an agency has bought a debt, then they have the ability to sue, but
by that time, the debt is likely to be rather old, and the agency doesn't
have much invested in it.
Collectors tend to focus on fear and intimidation, since those things
can work much more quickly, cheaply, and efficiently than legal action.
Lawsuits certainly are brought against plenty of debtors, but
not nearly as often as debtors fear. There is a big difference between,
"Pay up or we will continue with collection action," compared
to an actual Summons And Complaint.
If the debt is substantial and recent, and the debtor appears to be a
good target (e.g. reasonable assets or income), a lawsuit is a
real possibility. If you are served with legal documents specifying a
particular court, hearing date, etc., you should see a qualified attorney
immediately. That area is beyond the scope of this FAQ.
How are collection agencies regulated?
The most important law is the Fair
Debt Collection Practices Act, which places many restrictions
on collection activities. The FDCPA only covers third-party
collection agencies, not original creditors.
Each state may also have applicable laws regarding such things as telephone
Who enforces the FDCPA?
The Federal Trade Commission oversees the collections industry, and has
the authority to impose fines or other penalties for violations. However,
the FTC does not get involved with individual consumers' cases.
They accept a large number of complaints, and look for patterns of violations
which could then lead to action against a particular collection agency.
What if a collection agency has bought the debt?
The agency then becomes the creditor for most purposes. The debtor will
not be able to make any negotiations with the original creditor.
The agency might be technically able to file a lawsuit against the debtor,
(although this is not likely.)
However, the Federal Trade Commission has issued a Staff
Opinion Letter which indicates that, even if a collection agency has
purchased a debt, it is still covered under the Fair Debt Collection
Practices Act as a "third-party debt collector."
What about the relevant time limits?
The debt does not become some kind of "new" debt just because
of being sold. For example, the seven-year credit reporting time limit
is still based on the original delinquency date with the
original creditor. The statute
of limitations for filing lawsuits is also based on that same date.
These limits can not be legitimately "reset" by a collection agency
that has bought the debt.
However, the statute of limitations may possibly be reset if the
debtor makes a specific promise to pay, or a partial payment.
Can they do anything after the time limits are up?
Yes. The statute of limitations only covers the filing of lawsuits, and
the credit reporting time limit only covers bureau listings. There is
no time limit on letters and phone calls.
A collection agency that has purchased a bundle of "out-of-statute"
debts (where the SOL has already expired, or "run") is hoping
that, either the debtors will feel guilty, or that they won't be aware
of that "out-of-statute" status. But if a particular debtor
makes it clear that s/he understands the legal situation, then the collectors
are likely to give up and move on to easier targets.
Can collectors call the debtor's place of employment?
Yes, but there are limitations. For example, they can not legally
tell your employer about the debt, or try to have you fired.
Is there any way to make them stop calling?
Yes. According to section 805
of the Fair Debt Collection Practices Act:
"(c) CEASING COMMUNICATION. If a consumer notifies a debt
collector in writing that the consumer refuses to pay a debt or that the
consumer wishes the debt collector to cease further communication with
the consumer, the debt collector shall not communicate further with the
consumer with respect to such debt, except --
(1) to advise the consumer that the debt collector's further efforts
are being terminated;
(2) to notify the consumer that the debt collector or creditor may
invoke specified remedies which are ordinarily invoked by such debt
collector or creditor; or
(3) where applicable, to notify the consumer that the debt collector
or creditor intends to invoke a specified remedy.
If such notice from the consumer is made by mail, notification shall
be complete upon receipt."
So the consumer can just send a third-party collection agency a written
notice (preferably citing the FDCPA), ordering them to stop the collection
letters and calls, and the agency is legally obligated to comply. The
only permissible contact thereafter is to notify the debtor of specific
"remedies," like legal action, but usually the collectors won't
If the creditor hasn't yet made a decision on whether or not to file
a lawsuit, then that decision may be made at this point, rather than being
After a "cease and desist" notice from the consumer, the debt
may then be returned to the original creditor, passed on to another third-party
agency, or simply filed away, depending on the circumstances. The agency
may still report the account to the credit bureaus.
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