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. Debt collection is the process of recovering old debt that the borrower has failed to repay.

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

COVID-19 debt protections

If you are struggling to make your payments due to COVID-19 or think you may struggle with them down the road, contact your lender directly. Some lenders have created hardship programs that can help provide some relief for the short term. These hardship programs may allow you to defer or temporarily adjust your payments. While this can provide temporary relief, it doesn’t mean that your debt is being paid off or that it’s been forgiven.

There are also some government protections in place for those impacted by the COVID-19 crisis. The $1,200 stimulus check given to many Americans near the start of the pandemic, for instance, is generally protected from seizure for federal debt payments. In addition, many states have issued their own regulations regarding debt collection, with many states restricting garnishment and preventing debt collectors from initiating lawsuits.

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 co-signed 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 fail 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 is different depending on where you live.

Collection agencies can come after old debt as soon as it’s a couple of months past due and indefinitely after that. 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 it’s unsuccessful in getting you to pay what you owe, it’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, your 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, most 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, and 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 that you’ll be arrested, that police are on their way or that 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.
  • Lying about the debt, including making false claims about where it came from or that 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 that they’re attempting to collect a debt, you can contact government agencies to report them. Here’s how:

You can also 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.

How to deal with a debt in collections

If your debt enters into collections, this step-by-step guide can help you through the process.

  1. Confirm that the debt is yours. Debt collection agencies are required by the FDCPA to send you a debt validation letter before you pay anything. This is a crucial step in the process because it confirms if the debt does belong to you. A debt validation letter will also outline how much is owed, the type of debt owed, details about the creditor and other important information. If there are any errors, you have 30 days to dispute the debt.
  2. Explore your payment options. When it comes to paying your debt, you’ll typically have two repayment options. You can either pay off your balance in a lump sum amount or with a repayment plan. The best option for you will depend on your budget and the amount of debt owed. Before making a decision on a plan, calculate how much you can reasonably put down. You may be able to negotiate a repayment plan for less than what you owe, or you may choose to work with a credit counselor or go on a debt management plan.
  3. Begin making payments. Before you begin making any payments, reach out to your debt collector and ask for a written agreement. Once you’ve received the agreement and have carefully reviewed the information for accuracy, you can start making payments. After you’ve made your first payment, reach out to the collector to make sure that it was received and document every single payment you make for your future records.

How does a debt in collections affect your credit?

An unpaid debt in collections can have a major impact on your credit score. If you have a delinquent account, your creditor can report it to credit bureaus, resulting in a drop in your credit score. Collections can stay on your credit report for up to seven years from the first delinquent date. The impacts of this account should lessen with time. After seven years, the account should fall off of your credit report. If it doesn’t, you can file a dispute with the credit bureau in question and have it removed.

The 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.

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