How Collection Agencies Work

While they tend to be looked upon as being villainous, collection agencies actually serve a vital purpose. Without them, lenders would be far more reluctant to extend loans. Moreover, while you’ll often see collectors portrayed as venomous scoundrels relentlessly haranguing people who are struggling financially, most of them are actually concerned professionals who are looking for ways to help consumers resolve bad debts.

Here’s how collection agencies work.

Debt Collection Defined

A debt goes into collections when it meets the criteria of being considered past due according to the agreement signed when the loan was issued. In the case of credit card debt, this refers to the cardholder agreement a consumer signs when they accept the card. This usually happens when payment on a debt has not been made for 60 days or so.

At this point, the obligation is turned over to the “collections department” within the organization, though some companies may assign it straight to third-party collection agencies at this point instead. Debt collectors will then use the information they have to get in touch with the borrower to try to work out a payment agreement.

What Debt Collectors Can & Cannot Do

Collection efforts usually begin with a letter mailed to the address listed on the loan agreement for the borrower. Phone calls and text messages typically begin at this point as well. Collectors also seek to determine whether the contact information they have for the borrower is still current.

To this end, they can contact the people listed as references on the credit application. However they cannot disclose the nature of the situation to that person, unless they co-signed the loan or are listed as a co-borrower.

The exact regulations governing the actions of debt collectors are spelled out in the Fair Debt Collections Practices Act. Harassment and threats are prohibited. The Act also contains rules governing when and how they are allowed to contact you.

If a collector violates any of these regulations in their communications, consumers should;

It should be noted FDCPA rules apply only to third-party collectors, though legitimate original creditor collectors generally abide by them as well.

How to Respond to Debt Collectors

The most important thing to remember if a debt collector contacts you is to ask for all of the pertinent information they have about the debt before acknowledging responsibility for repaying it. People make mistakes all the time. Moreover, the debt might be too old to pursue legally.

Confirmation information should include:

  • Name of the original creditor and the date the loan was issued
  • Amounts borrowed and owed — including late fees and other charges
  • Options for disputing the debt

The next thing you should do is get copies of your Experian, Equifax and TransUnion credit reports to see if the debt in question is listed there and its payment status (if it is listed).  Dispute it vigorously within 30 days of receiving the information if the debt isn’t yours. Devise a plan to satisfy the debt or look into getting credit card debt relief if is yours and paying it will be a problem.

Understanding how collection agencies work will help you get a handle on your rights so you can deal with them more effectively. With that said, if you owe, you owe — there’s no way around it. However, you can always work out deals to make repaying debts easier so don’t be afraid to face them head on.

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