How Does Debt Collection Work?

Quick Answer

Debt collection is the process of collecting an unpaid debt from a borrower by a collection agency or third-party debt collector. It’s important to know your rights if you have a debt in collections.

A man discovers in a letter that his debt has gone to collections.

Debt collection is the process of collecting an unpaid debt from a borrower—generally, after the borrower has missed three or more monthly payments—by a collection agency or third-party debt collector.

Having a debt in collections can be stressful, but understanding what debt collection is, how it works, how to deal with debt collectors and the protections and assistance available can help you manage the process with more confidence.

What Is Debt Collection?

Debt collection is simply the act of attempting to collect payment on an overdue account. If you have a debt in collections, a third-party debt collection company, collection agency or debt buyer will try to recover the delinquent amount. Types of accounts these companies may pursue include credit card, rent, phone, car and medical bills.

Your original creditor may charge off the account, which shows up as an entry on your credit report and means the creditor has given up hope that you will repay your debt and closed your account. When this happens—usually after 120 days or 180 days for a credit card—you may be contacted by a third-party debt collection company to recover the money owed on your delinquent accounts. You will no longer communicate with the original creditor but will now solely deal with a debt collector instead.

How Does Debt Collection Work?

When a debt collector contacts you for the first time, they must provide certain information, either electronically or in writing, about the debt you owe. This is called a validation notice, and it's intended to ensure the debt is yours and inform you how to dispute the debt if it isn't.

Generally, the notice will include how much you owe, the original creditor's name, how to find the original creditor's contact information, the account number associated with the debt, the amount due and how to dispute the debt if you don't feel it's yours.

If you don't think the debt is valid, you can send a dispute letter to the debt collector within 30 days stating you don't recognize the amount in question. Once they receive your letter, they can only try collecting on the debt after sending you verification of the debt, such as a copy of the original invoice.

During the debt collection process, the debt collector may call you at home or work; mail, text or email late payment notices; or even show up at your front door. They may contact you through social media, or get in touch with your friends or family to confirm your contact information. However, they cannot contact friends or family more than once or disclose why they are asking for this information.

In a nutshell, a debt collector will do whatever is necessary (within the law) to get your full attention. That said, debt collection is regulated at the federal and state levels, and you have rights that debt collectors must honor.

What Is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (FDCPA) governs debt collection practices and forbids debt collectors from using deceptive, abusive or unfair means to collect a debt. If a debt collector violates the conditions laid out by the law, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB) or take the debt collector to court.

Specifically, under the FDCPA, a debt collector cannot:

  • Threaten violence or use other criminal means to harm you, your property or reputation
  • Use profane or obscene language
  • Publish your name, except to a consumer reporting agency
  • Advertise a debt for sale to coerce payment
  • Abuse, annoy or harass you by repeatedly calling you at any time, day or night or before 8 a.m. or after 9 p.m.
  • Call you without properly identifying themselves, except to obtain your address
  • Use any false, deceptive or misleading representation
  • Use unfair or unconscionable means to collect or attempt to collect a debt

The FDCPA and state laws also govern the statute of limitations, or how long a creditor or debt collection agency can legally file a lawsuit to recover the debt. Most statutes of limitations range from three to six years, although they may extend for longer in some states.

How Does Debt in Collections Affect Your Credit?

Once you receive a validation notice from a debt collector, they can report the collection account to the credit reporting agencies. A collection account appears as a separate account from the original debt on your credit report and can have a significant negative impact on your credit score. Collection accounts remain on your credit report for up to seven years from the date the original account first became delinquent.

Paying off your collection account will end the debt collector's actions, but it can take a couple months to see a change in the account status reflected on your credit report. Paying the account will not remove it from your credit report, but it can have other benefits:

  • Newer credit scoring models ignore collection accounts with a zero balance, so your credit score could increase once you pay off the account.
  • Potential lenders prefer to see a paid-off collection account when they check your credit report as part of a credit application; mortgage lenders often require it. Paying a collection account in full indicates to creditors you took financial responsibility for your debt.
  • You'll no longer be harassed by the debt collection company.

Generally, the more recent the collection account, the more it will hurt your credit score. If the collection is the only negative item on your credit report, paying it off could help to improve your credit score.

How to Deal With Debt in Collections

Understanding your rights and taking these steps to deal with debt in collections can help you make a bad situation better:

  1. Check your credit report. If you check your credit report and don't see the collection account listed, you might be able to pay the collection agency before the debt appears on your credit report.
  2. Confirm you owe the debt. If a debt collector contacts you or sends a validation notice with the creditor's name and the amount owed, make sure the information is accurate. If you're unsure and want to dispute the debt, ask for verification in writing within 30 days. The collection process will stop until the debt collector can verify the debt.
  3. Try to negotiate. If the delinquent debt is yours and you plan to make payments, see if you can repay the debt in monthly payments instead of one lump sum. You may be able to negotiate a lower payment amount, but when it comes to your credit, it's best to pay the debt in full.
  4. Pay off the account. Collection accounts stay on your credit report for seven years, but some newer credit scoring models do not consider paid collection accounts in score calculations—so it's to your advantage to pay off the account as soon as possible.
  5. Request an end to communication. If you send your debt collector a cease and desist letter asking them to end communication with you once the debt is paid, they must comply under certain circumstances. If you need help with what to say in the letter, contact an attorney. The CFPB also provides sample letters to get you started.
  6. Consider legal action. If you feel the debt collector has violated your rights under the FDCPA, you may want to reach out to an attorney to discuss your options.
  7. File a complaint. Both the Federal Trade Commission (FTC) and the CFPB can help you file a complaint against a debt collector if you feel your rights have been violated.

The Bottom Line

Debt collection is never fun. But on the positive side, taking responsibility for your debt is the first step in getting back on track financially. While being proactive in paying your debts is essential, it's also important to regularly check your Experian credit report and FICO® Score to see what information is being added, updated or deleted to your report and what effect it's having on your score.