What is debt collection and how does it work?

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If you have an old debt with an outstanding balance or you’ve fallen behind on payments, you may have already heard from a debt collection agency. If not, there’s a chance you will soon.

Before you pick up the phone or make a payment, understand what a debt collector is and how they affect you.

What is debt collection?

Debt collection is when a collection agency or company tries to collect past-due debts from borrowers. You might be contacted by a debt collector if you haven’t made loan or credit card payments and those payments are severely past due.

If you’ve cosigned a loan or you’re an authorized user on a credit card for someone else, you might also be contacted by a debt collection agency looking to get paid for money owed. Those overdue debts can be anything, including:

  • Medical debt.
  • Car/auto loan debt.
  • Personal loan debt.
  • Credit card debt.
  • Student loan debt.
  • Unpaid utility and phone bills.

Debt collectors are third-party companies that work on behalf of another company to collect debts. If a company works for the original creditor, the creditor pays the debt collector a percentage of the debt collected. Sometimes, debt collection agencies will buy out the original debt for pennies on the dollar after you failed to pay back the debt to the original creditor — and then go after you.

How does debt collection work?

Debt collection might vary based on the company that’s collecting a debt. Some agencies only deal with a specific kind of debt, like medical debt or student loan debt. Others might deal with debt that’s a few years old. Others might not deal with debt if it’s past the statute of limitations, which are different depending on where you live.

Collection agencies can come after old debt as soon as it’s a couple months past due or as long as indefinitely. It depends on the company collecting the debt, how much you owe and the type of debt you have.

If you have unpaid past-due debt, you’re typically alerted through written notices and phone calls through your original creditor. For instance, if you have an old student loan you stopped paying, your lender will make attempts to contact you to get the account current. If they’re unsuccessful in getting you to pay what you owe, they’ll eventually stop. That’s usually when the transition from the original creditor to debt collector occurs.

Debt collection agencies and debt collectors will use the information on file to contact you. Your current address, phone number and even contact information for your relatives are used. If they can, debt collectors will use personal banking information, including savings and investment accounts, to determine if you have the money to repay a debt. Some states allow wage garnishment to collect old debts.

How reputable collectors operate

While there are plenty of agencies that use harmful practices for debt collection, there are some that follow the rules and go about retrieving money from past-due accounts in a professional manner.

Reputable debt collection agencies will send letters to the address you gave your creditor. If there’s a way to see that you’ve moved, agencies can send letters to your new address in an attempt to collect a debt. Whether agencies send you letters or call, they’re required to give you specific details about your debt, including:

  • The name of the original creditor.
  • The amount you owe (including late fees and other charges).
  • Your ability to dispute the debt in question, along with stipulations.

The collector must say that you have 30 days to dispute the debt in writing. If you request the name and address of the original creditor, they need to tell you. If you don’t dispute the debt within 30 days, the agency considers your debt valid. They can continue to contact you to collect a debt.

Companies that follow the rules will work within the statute of limitations, based on the type of debt you owe and where you live. They’ll contact you only between 8 a.m. and 9 p.m., although you might get many calls within one day.

When collection agencies operate the right way, you shouldn’t experience harassment or threats. If a company says you’ll be arrested, or police are on their way, or someone is coming after you, they’re not acting lawfully.

Why the Fair Debt Collection Practices Act matters

Because of the Fair Debt Collection Practices Act, or FDCPA, you as a consumer don’t have to stand for harassment and threats from debt collectors. Some tactics that aren’t allowed include:

  • Pretending to be an attorney, law enforcement or anyone other than a debt collector to make you pay.
  • Lies about the debt, including false claims about where it came from or if you owe more than you do.
  • Other deceptive or abusive practices, including threatening to have you arrested.

If you’re experiencing harmful practices by a debt collector or someone claiming they’re attempting to collect a debt, you can contact government agencies to report them.

You can sue a debt collector under the FDCPA for deceptive practices. If you win in federal court, the debt collector will pay your attorney fees and possibly damages.

Bottom line

Collecting a past-due debt is a legal way for creditors and debt collection agencies to get money that’s owed to them. If you’re late on payments — or haven’t made them at all — you owe it to companies to pay that money back. Otherwise, you could face a barrage of calls and letters from debt collectors trying to collect a debt.

But while you might owe money, you have the right not to be the subject of deceptive or abusive behavior from a debt collector. If someone is harassing you to collect a debt, you can take action right away. Contact federal agencies or your state attorney general to file a complaint.