When your debt becomes delinquent, creditors can involve a debt collector. A debt collector may work independently or for a debt collection agency. However, they have the same goal, which is to collect customers’ delinquent debts.
In this article, we explore how debt collection works from the collection agency’s perspective. Understanding their motivation and incentives will help you to better navigate your interactions with them should the need arise.
How Debt Collection Works
Creditors lend you money with the hope of receiving payment back. But if for whatever reason, you’re unable to pay back by the due date or the end of the “grace period” (which is typically 60 days), your debt becomes delinquent.
Creditors know that the longer payment is delayed, the lower their chance of receiving it. Following up with debtors can be too burdensome. That’s why they delegate that responsibility to a debt collection agency. Debt collection agencies collect several kinds of delinquent debts, including personal loans, credit cards, student loans, medical bills, and even unpaid utilities. – albeit most collection agencies tend to specialize in the type of debt they collect. For instance, a collection might only collect delinquent debts that are more than $300 and less than two years old.
Types of Debt Collection Agencies
In return for the services rendered by debt collection agencies, the creditor has to compensate them. How this is achieved is dependent on the type of collection agency. There are two types of collection agencies, and they include:
- Hired Collection Agencies
Here, the creditor hires the collection agency as a middleman to collect delinquent debts on their behalf.
If the collection agency successfully collects all or part of the money, they receive a percentage cut, which can range from 25% to 45%. As you can see, the higher the collector can recover, the higher their earning potential.
Note that, in this case, the agency only gets paid if it can collect money from you.
- Collection Agencies Buying Debt
Another option for creditors is to sell their delinquent debts to debt collectors – which, in this case, are referred to as debt buyers. Creditors usually sell their delinquent debts to collection agencies when they’ve lost hope on the delinquent account.
Debt buyers usually buy delinquent debts, with similar features, bundled together as a group. Such features may include relative new debts with no other third-party collection activity or very old accounts other collectors have failed to collect on. In general, newer debts are more expensive than older ones.
Because debt buyers are taking a huge risk as they might be unable to eventually collect the debt, they usually pay pennies on the dollar to creditors. Sometimes, they can pay as low as 5 cents for every $1 of debt. So a $1,000 of delinquent debt may be sold for only $50.
Therefore, debt buyers only need to collect just part of the debt owned to hit profitability. And if they’re able to collect part or all of the delinquent debt, they keep all the balance to themselves as profit.
Steps in Debt Collection
Once a debt collection agency receives your delinquent debts from your creditor, they must send you a written notice specifying how much you owe within five days before making the first contact.
As the debtor, you may then request debt validation. This is to verify that you owe the past-due debt. During this stage, the collection process is suspended until the details of your debt are verified. The collector sends you a notice of how much you owe, the company owed, and how to pay it. Make sure you confirm also from your end.
If the debt can’t be verified, then you shouldn’t pay it. And if the debt is yours, you can work out an arrangement with the collection agency that works for both parties.
What a Debt Collection Can and Cannot Do
As you can now see, the only way debt collection agencies can make any money is by collecting delinquent debts. And more often than not, people with delinquent debts are usually in a financially stressed situation. Hence, unscrupulous collection agencies may harass or adopt scare tactics to extract money from them.
To counter such practices, the Fair Debt Collection Practices Act of 1977 was enacted. It stipulates how collectors are to interact with debtors when collecting debts. Here are some of the things that are illegal for debt collection agencies to do:
- Written notice before contact
Debt collectors must send you a written “validation notice” to inform you of how much you owe within five days of first contacting you.
- Calling at odd hours
A debt collector isn’t allowed to contact you at any inconvenient place and time, such as before 8 a.m. and after 9 p.m. You can also tell them not to contact you during working hours.
- No pretense
A collector cannot pretend to be someone else – such as an attorney, government official, or employee of a credit reporting company – with the intent of getting the debt from you.
- No harassment
It’s illegal for collectors to threaten or harass you. Know that you cannot be arrested for not paying your debt, so don’t let them use that to scare you. They also cannot garnish your wage unless a judge permits them to.
- Discussing your debt with others
While debt collectors can contact your employee or people you know to get your contact information, they are not at liberty to discuss your debt with them. They can only discuss your debt with you, your spouse, or your attorney.
Contact us today for more information.
