A collection agency is enlisted by creditors to salvage overdue funds from accounts that have fallen into default. When traditional debt collection methods fail, creditors may opt for the services of these specialized companies or utilize internal departments dedicated to debt recovery.
Key Insights
- Collection agencies are called upon to recover overdue accounts and defaulted debts on behalf of creditors.
- They operate in accordance with the Fair Debt Collection Practices Act (FDCPA) which restricts certain practices in debt collection.
- The collaboration between collectors and lenders aims to retrieve delinquent funds using regulated approaches.
How Does a Collection Agency Operate?
Creditors often engage with collection agencies when a borrower’s debt falls between 60 to 90 days overdue. Upon pursuing in-house collection unsuccessfully, they report the delinquency to major credit bureaus - Equifax, Experian, and TransUnion. Reputable collection agencies comply with the FDCPA, governing the methods they use to attempt debt collection.
Scenario 1: Borrower Makes Payment
If the collection agency’s efforts result in payment of the debt, the creditor compensates the agency with a part of the recovered funds, as stipulated by their agreement.
Scenario 2: Borrower Fails to Pay
Should the borrower be unable or unwilling to pay, their credit report may be updated with a “collection” status. Such status can drag their credit score down, influencing future loan approvals. This negative entry can remain on a credit report for as long as seven years.
Collection agencies resort to several tactics to secure funds including:
- Persistent calls to personal and work numbers.
- Mailed reminders and notices.
- Contacting nearby acquaintances for updated contact specifics.
- Direct visits to the debtor’s residence.
Understanding Collection Agency Regulations
Third-party collection agencies fall under the jurisdiction of the Fair Debt Collection Practices Act (FDCPA), which outlines both prohibited activities and permissible collection methods.
Forbidden Practices:
- Revisiting a charged-off debt declared “uncollectable,” typically due to bankruptcy or inability to contact the debtor.
- Seizing a debtor’s assets without court approval.
- Using threats or violence to extract debt repayments.
- Communicating with debtors’ workplaces if such contact is prohibited by the employer.
- Repeatedly contacting a debtor more than seven times within seven days.
Permitted Practices:
- Pursuing aged debts within a state-allowed statute of limitations, typically spanning four to six years from the first date of default.
- Calling debtors strictly between 8 a.m. and 9 p.m.
- Informing employers about overdue child support, federal student loans, or taxes where applicable.
Potential Actions by a Collection Agency
Collection agencies retain the legality to initiate lawsuits against owed debt. Successfully winning such cases permits court actions to extract bank-held funds or garnishing wages.
Non-Compliance Implications
Failure to act on a collection agency’s court order could lead to arrest. Additionally, non-compliance with lawsuit-related financial disclosures or testimonies may also spawn arrest warrants.
The Value of Settling With a Collection Agency
Settling owed amounts can be advantageous if financially feasible, potentially aiding in repairing your credit and evading future lawsuits. Should overwhelming debt exist, seeking professional guidance on potential bankruptcy filings could be prudent.
The Essential Takeaway
Creditors systematically opt for collection services to address non-performing debts, which can be challenging for affected debtors. Immediate debt resolution, when viable, may mitigate further harm to credit ratings. Educating oneself about FDCPA regulations affords critical protections and helps navigate collection agency interactions with informed assurance.
Related Terms: creditor, borrower, credit score, debt.
References
- Federal Trade Commission. “Fair Debt Collection Practices Act”.
- Consumer Financial Protection Bureau. “Understand How the CFPB’s Debt Collection Rule Impacts You”.
- Federal Trade Commission. “Debt Collection FAQs”.
