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If you've fallen behind in your credit card payments, overlooked a medical bill or haven't paid the rent in a few months, you may have been contacted by a debt collection agency. A collection agency is a company used by lenders and creditors to recover funds that are in default or past due.
Hearing from a debt collector can be jarring, but might not be a complete surprise. Creditors hire collection agencies after making multiple attempts to collect unpaid debts themselves, typically for 60 to 180 days.
How you respond to a debt collector will take some thought and depend on your situation. Knowing your rights, devising a strategy and managing communications can help you minimize damage to your credit—and minimize stress as you navigate the process.
How Does a Collection Agency Work?
Collection agencies may be brought in when a company has failed in its efforts to collect an outstanding debt. If a creditor has sent your debt to collections, they expect to receive only a portion of any money collected. For them, this is preferable to receiving nothing at all—or continuing the process of trying to collect your debt themselves.
You may encounter one of two types of third-party debt collectors:
- Agencies that collect debt on a creditor's behalf: These agencies pursue payment in exchange for a percentage of the money they collect—typically 25% to 50%.
- Debt buyers that purchase debt from the lender: A creditor may believe that the likelihood of collecting your debt is so remote that they sell your debt for pennies on the dollar.
Debt collectors only make money when they collect on your debt. They are single-minded, persistent and highly motivated. If a collection agency contacts you, don't assume you can ignore them and hope they go away. Instead, manage your relationship with them proactively and remember that you have specific rights when dealing with them.
What Are Debt Collectors Not Allowed to Do?
Third-party debt collectors must abide by rules set forth in the Fair Debt Collection Practices Act (FDCPA), and it's worth familiarizing yourself with the many provisions of the law. Here's a sampling of regulations with which debt collectors must comply:
- Calls: Collection agencies may only call you between 8 a.m. and 9 p.m. If your employer doesn't permit you to take outside calls during work hours, debt collectors can't call you at work. They may not call you repeatedly in what amounts to harassment if you ask them to stop calling.
- Mail: An agency can send you mail, but can't send a postcard—the contents of which would be visible to anyone. If they send a letter, the envelope should not include a company logo or language that would identify it as being from a debt collector.
- Contacting friends and family: If a debt collection agency does not have your contact information, they are allowed to contact your relatives, neighbors and associates. However, they cannot reveal that they are collecting a debt and cannot discuss any aspect of your indebtedness with them.
- Disclosure: A collection agency must disclose who they are, that they are trying to collect a debt and that any information they obtain from you may be used to assist them in collecting the debt.
- Threats, lies and obscenity: Debt collectors can press you for payment, but they can't threaten your safety or use profanity. They also can't publicize your situation. And they can't lie—for instance, by saying they're about to file a lawsuit they have no intention of filing.
Additionally, the debt an agency is pursuing must be valid. You have the right to request, in writing, a debt validation letter showing how much you owe and to whom. The agency must provide this information within five days of initially contacting you.
With this information, you should be able to identify what the debt is, determine whether or not it's been previously paid, is the correct amount, and whether it is recent enough to fall within your state's statute of limitations (more on this later). You are also entitled to know the collection agency's name and mailing address so you can check with your creditor to confirm they are legitimate.
How Do Collections Affect Your Credit Scores and Reports?
Having an account in collections has a significant negative impact on your credit, and it will stay on your report for seven years.
But it's likely your credit scores began to suffer before the collection agency ever got involved. Late and missed payments both factor into determining your credit score, and by the time your account goes into collections, they could have already been reported to the three major credit bureaus (Experian, TransUnion and Equifax).
Check your credit report and score as soon as you are contacted by a collection agency. You'll be able to see whether the information has been reported and what impact it may be having. If your original creditor does not routinely report information to credit bureaus—for instance, if you owe your doctor's office or landlord—they may not have reported that your account is in collections yet. In this case, you may have an opportunity to resolve the debt before a report is made. However, if you owe money to a credit card company, bank or other lender, late payments and collections have probably already been noted. Also be aware that if your account has been sold to collections, that debt can be reported as a separate account on your credit report.
If you believe any information reported is inaccurate, you can file a dispute with the credit bureau on whose credit report the information appears. Since collections have an impact on your credit report and score, it's worth correcting any errors you find.
Tips for Dealing With Collection Agencies
Dealing with debt collectors is rarely fun, but it should be manageable—at least with a little strategizing on your part. Here are a few tips to get you started:
- Learn your rights. Study up on FDCPA rules and contact the Consumer Financial Protection Bureau if you feel the rules are being violated. Visit your state attorney general's website to find out what the applicable statute of limitations is. Your state sets rules on the time companies can take to collect outstanding debt, typically three to six years. If an agency is trying to collect an expired debt, you can send a cease and desist letter and stop collection activity. This also applies if you are approaching the statute of limitations. Important: If your debt's statute of limitations is expired or about to expire and you agree to start payments, you may reactivate the debt and reset your timeline.
- Tackle collections head on. Though it's no fun having to confront a collection agency, ignoring a call or notice will probably only make things worse. If a debt collector can't reach you but believes the debt is recoverable, they can seek a judgment in court that could result in your wages being garnished or assets seized.
- Take control of the conversation. Don't let a call from a collection agency catch you off guard—have an idea what you'll say when the phone rings. Feel free to answer the call, but don't have a lengthy conversation or agree to anything in this initial contact. Ask for a debt validation letter and set a time for a follow-up call. In the meantime, take the time to validate the debt, confirm the identity of the collection agency and decide how you'd like to proceed.
- Decide how you will pay. If you can pay the debt in question immediately, this is probably your best option. You'll end the collection process and can move on with the business of healing your credit. The collection agency may be willing to negotiate a payment plan or partial payment of your debt, which may or may not impact your credit going forward. Finally, if you are in the process of bankruptcy and/or cannot pay, look into whether you may be "judgment-proof," with no assets to garnish. In this case, you may be able to halt collection activity.
Take Action to Limit the Impact of Collections
A third-party collection agency can pursue your debt aggressively, impact your credit and seek legal judgments. However, their power is finite. By knowing your rights, being proactive and working toward the common goal of rectifying your situation, you can minimize the effect dealing with a third-party collection agency has on your life and financial well-being.
If a collection agency has contacted you, check your credit report at all three reporting bureaus using AnnualCreditReport.com. You can also check your credit report for free every 30 days directly through Experian. To keep a close eye on your credit, sign up for Experian's free credit monitoring service, which provides you with updates on your Experian credit report, FICO® Score☉ and irregularities that could be the result of fraud.