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What You Need to Know About Debt Collectors

I had a run-in with a debt collection agency [1] in my mid-twenties. It is not something I like to talk about or advertise, as I think anyone who hears “debt collection agency” must think that the person being called and written to is in the wrong. But this wasn’t the case with my debt. My run-in with a collection agency was based on debt that had accrued on a lease I had broken, despite the manager of the apartment complex telling me that they had found someone to assume my lease and that I had owed no further money (big lesson in making sure I get everything in writing!).

What I found out the hard way is that there is no enticement to clear up a fraudulent or incorrect debt bill because of the payment system set up at collection agencies. So even though I disputed my debt [2] with the collection agency, they ignored it and moved onto the next debt. Then I didn’t hear from the next collection agency (it turns out that selling disputed debts to another collection agency is common practice) until a year later.

I’d like to discuss a bit about collection agencies so that you are in a good position to deal with or fight one in the event that your debt has landed there. And if your debt is turned over to a collection agency, you’ll need to deal with it if you want to get a new credit card [3] or apply for a mortgage [4] in the future.

How a Debt Collection Agency Works: Pay Structure

Author Fred Williams, a journalist who worked at a collection agency for three months [5] in order to score some vital information about the industry, summed it up best: the objective for the 400,000+ debt collector agents across the US is to get the debtor on the phone, demand payment, and rebut excuses. Agents have heard all of the “normal” excuses when trying to collect debt a thousand times over, so they are really not sympathetic when you give them yours. Even more so than that, the pay structure within collection agencies does not leave room for sympathetic agents.

Third party collection agencies get their hands on your debt because lenders sell off their bad debts on an open debt market. On this market debts usually cost just 5% of the balance due, or even 2% for older accounts.  The agency itself earns a contingency fee for the amount of debt collected. In order to motivate their agents to collect as much debt as possible, they give monthly quotas agents must meet as well as bonuses for those who collect more.

Types of Debts Collected

There are two different types of debt categories that are collected by agents: retention accounts versus collections. While we all know what collections are—delinquent debt for consumer or student loan debt [6]—the retention accounts are a bit different. Retention accounts are when cardholders have missed a few payments and so cannot make more charges onto their cards. They still have a window of opportunity to make their account current and not have it shut down. And this is particularly important for banks/lenders because if the account is moved to a current status again, then they can charge interest on the balance (note that sometimes they can charge interest on the balance even when it is charged off; however, it is typically for a much lower interest rate per the terms of the card). There is a plus side to the consumer: if their card account is shut down, then they will owe the balance in full all at once. So it is often in your best interest (though not if you are trying to get out of debt [7]) to go into a monthly payment plan with the collection agent.

Third Party Versus In-House Debt Collectors

It is important to know the difference between the primary creditor (who you were originally indebted to) and the third party collection agency. This is because the Fair Debt Collection Practices Act [8] offers you protections against third party collectors but not primary creditors. Some of these protections include:

  • Within five days of contacting you the collector must send a validation notice stating the amount of the supposed debt, the original creditor, and the process for disputing the debt.
  • The agent can only call you between 8:00 a.m. and 9:00 p.m.
  • While agents can call you at work, they may not do so if they know that your work does not allow it. This means that if you need them to stop calling, be sure to say something like, “my employer does not allow non-work-related phone calls.”
  • Agents are allowed to contact neighbors, friends, coworkers, etc. to ask where you are located. However, they may not discuss your debt or the fact that you have debt without your permission.

Have you ever had a run-in with a debt collection agency? How did it go?

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