What is a
There are two
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.)
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 creditor.
This FAQ focuses on
How do they
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
The primary tools of
a collection agency are letters and telephone calls.
What are the
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
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 tone.
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.
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
What are the
phone calls like?
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
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
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.
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.
can not legally make any kind of public
announcements or disclosures concerning the debt, except to the credit
can not legally get a debtor fired from his/her job.
can not legally engage in any type of physical
violence or threats thereof.
Why does the
Often, the reasons
include fear, guilt, intimidation, and a lack of understanding of the
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 debt.
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.
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
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
How long do
collection accounts last?
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.)
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.
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 harassment.
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.
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:
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 --
advise the consumer that the debt collector's further efforts are being
notify the consumer that the debt collector or creditor may invoke
specified remedies which are ordinarily invoked by such debt collector
or creditor; or
applicable, to notify the consumer that the debt collector or creditor
intends to invoke a specified remedy.
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 even
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 delayed.
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.
Credit Problems Menu
Agencies Alphabetical List