You may not know it when a debt collector calls, but some have bigger incentives than others for pushing you to pay.
There are two types of collection agencies: Ones that are hired by creditors to collect debts, and those that buy old debts from original creditors for sometimes pennies on the dollar.
Understanding the motivations and incentives of both types of debt collectors can smooth your interactions with them.
Hired collection agencies
Debt collection agencies are sometimes hired by creditors to collect debts that are at least 60 days past due. The more money they collect, the bigger cut they get, often 25-45 percent of the amount collected. The rest goes to the creditor.
These agencies act as middlemen to collect all types of delinquent debts, including credit card, medical, car loans, personal loans, student loans, and unpaid bills such as utility and phone bills.
The agency only gets paid when it collects your debt, and the more it recovers, the more money it receives as payment for its services.
Agencies buying debt
A second type of debt collector is a debt buyer. It buys debts from an original creditor that has determined that it’s unlikely to collect.
Numerous accounts are sold together as a group, often with similar features such as accounts that aren’t too old and haven’t been worked on yet by another debt collector. Those debts could fetch higher prices from a debt buyer than old accounts that other collectors have failed to collect on.
Debt buyers bid on the packages, sometimes paying 4 cents of every $1 of debt. An account with $1,000 owed would cost $40 to purchase, for example, and every penny collected after $40 would be a profit for the debt buyer.
Debts can also be sold by type. An old mortgage debt is worth more than a utility debt.
A debt buyer doesn’t send any of the amount collected to a creditor. It keeps all of the money it collects because it has already paid the original creditor for the debt. This can make a debt buyer more unsavory, to put it nicely, in the methods they use to collect debts.
How debt collection is supposed to work
Reputable debt collectors are supposed to follow the laws, including consumer protection laws. When contacting a debtor, they’re also supposed to be fair, respectful and honest.
For example, debtors have the right to make a written request for verification of debt they’ve been contacted about. The debt collector is supposed to suspend collection activities and send a written notice of the amount owed, the company owed to and how to pay it.
If the debt can’t be verified by the collector, it will stop trying to collect it. It will also notify the credit bureaus that the item is disputed and request that it be removed from the person’s credit report.
If the collector doesn’t own your debt, it will tell the creditor that it has stopped trying to collect because it can’t verify the debt.
An honest and reputable debt collector will try to get accurate and complete records so they don’t go after people who don’t really owe money. If you tell them you were the victim of identity theft, they should try to verify your claim.
How dishonest collectors work
Unscrupulous debt collectors, however, may violate the Fair Debt Collections Practices Act, or FDCPA, or come close to breaking it.
Debt collection is the financial product or service most complained about to the Consumer Financial Protection Bureau, the CFPB reports. Specific complaints include:
- Being contacted about debts no longer owed.
- Accounts forwarded to third-party collectors without any notice from original debt holder about an outstanding balance.
- Bothered by frequent daily calls by debt collectors at home and at work.
Debt collectors are often pushy because they’re taught in training that all debtors are compulsive liars, according to a story based in part on a book by a former debt collection agency owner.
They may ask you to pull money from areas that would make your financial planner cringe: Retirement accounts, another credit card, or borrowing from friends and family.
The Federal Trade Commission, or FTC, enforces the FDCPA, the main law prohibiting debt collectors from using abusive, unfair or deceptive practices to collect money. Here are some of the protections under that law:
- Calling at all hours: A debt collector can’t contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m. They can’t contact you at work if you tell them you’re not allowed to take calls there.
- No pretending: They can’t pretend to be someone else when contacting you, such as an attorney or government agency. They also can’t falsely represent that they work for a credit reporting company.
- No harassment: Harassment, threats and deception are illegal. This includes using profanity, threats of violence, calling repeatedly, saying you’ll be arrested if you don’t pay your debt or that they’ll garnish your wages unless permitted by law to do so.
- Limits on contacting others about your debt: Debt collectors may contact people you know, but they can’t discuss your debt with anyone other than you, your spouse or your attorney. They can contact other people to find out your address, home phone number and where you work. They’re usually prohibited from contacting third parties more than once.
- Written notice: Every collector must send you a written “validation notice” telling you how much you owe within five days of first contacting you. It must include the name of the creditor and how to proceed if you think you don’t own the money.
- Unfair practices: Collectors can’t engage in unfair practices when trying to collect a debt. These include trying to collect any interest, fee or other charge on top of the amount owed unless state law allows the charge; deposit a post-dated check early; take or threaten to take your property unless it can be done legally; contact you by postcard.
How to deal with collectors
To deal with a debt collector, it can help to know your rights. Tell them not to call you at work, ask for written notice, and report them to your state Attorney General’s office, the FTC and the CFPB if you think they’ve violated the law.
You also have the right to tell the collector not to contact you again, even if the debt is legitimate. Sending a letter to the collector telling them not to contact you again won’t erase the debt, but it should stop the contact. The creditor or collector can still sue to you collect the debt.
When you write such a letter, send it by certified mail and pay for a “return receipt” so you can document when the collector received it. Make a copy of the letter for yourself.
Once received, the collector can only contact you in two instances — letting you know they’re filing a lawsuit or other specific action, or to tell you there will be no further contact.
It’s also worthwhile to know the statute of limitations in your state on when lawsuits can be filed over unpaid debts. The FDCPA limits the right to sue for payment by state, ranging from three to 10 years in most states.
After the time has elapsed in your state, you’re no longer obligated to pay the debt — no matter how many times a debt collector calls.
But there’s one big caveat. If a consumer makes a payment on a debt, even a small amount, then the time limit on debt collection lawsuits may be extended. A payment resets the clock.
Largest Collection Agencies
If you have been contacted by one of the following collection agencies, click on the link to learn how to deal with them.
Alltran (Formerly United Recovery)
Cavalry Portfolio Services
Credit Collection Services (CCS)
Midland Credit Management
What’s been your experience with collection agencies? Let us know down in the comments.