What is a Debt Collection Agency?

Your phone rings. You answer, and someone from a company you don’t recognize asks about a past-due bill. Asking questions to verify who’s calling and making sure you’re not speaking to a scammer is a smart move. However, if the debt sounds familiar and you’ve missed a few payments lately, you may be speaking to a debt collection agency.

A debt collection agency is a company that collects unpaid debts on behalf of a lender. When you miss multiple payments for a debt, your original creditor may try to collect the debt or they may also allow another party, called a debt collection agency, to try to collect the debt on their behalf.

It’s important to know what it means to have a debt subject to collection, how debt collection agencies work and what rights you have as the debtor.

How do debt collection agencies work?

If you stop making payments on an account for a certain amount of time — at least 30 days, but sometimes longer — the account may be considered past due or delinquent.¹ At that point, the creditor (the company you owe money to) may begin the collections process. In many cases, the creditor may first reach out to you directly about your overdue account, sometimes using an internal team dedicated to collections. But if they’re not successful, they may turn to a third-party debt collector.

There are two types of debt collectors you may encounter:

• Debt collection agencies: External companies hired to collect payments on behalf of the creditor
• Debt buyers: Companies that purchase debt from the original creditor, often for less than the full amount owed, and then attempt to collect the full balance

A debt collector may reach out by phone, mail, email, text message or social media to ask for payment.²

What are your rights when debt collectors contact you?

The Fair Debt Collection Practices Act (FDCPA) is a federal law that sets rules about how third-party debt collectors should behave when they contact you about a debt.

Under the FDCPA, you have the right to ask for written proof of the debt. Once a debt collector contacts you, they’re required by law to provide you information about the debt owed when they call or send a debt validation letter within five days. A debt validation letter contains information intended to verify how much money you owe and to whom. It also contains instructions about what to do if you believe you do not owe the debt.³

You also have the right to ask a debt collector in writing to stop contacting you. If you do, they’re generally required to comply, with limited exceptions.⁴ However, you still owe the debt and the debt collector still has the right to collect it even if they stop contacting you.

What can’t debt collectors do?

The FDCPA protects you from abusive, unfair or deceptive practices. Under the law, debt collectors may not:

• Contact you at unreasonable times: Debt collectors may not contact you before 8 a.m. or after 9 p.m. in your time zone.⁵ They also can’t contact you at work if your job doesn’t allow you to take phone calls.⁶
• Engage in any contact that qualifies as harassment:⁷ Harassment might include making excessive contact via phone call or other electronic communications, including text, email and social media messages, using obscene or profane language, threatening you or refusing to identify themselves.
• Act dishonestly: Debt collectors may not misrepresent the amount you owe, pretend to be someone they’re not or threaten legal action they don’t intend to take.⁸
• Share details about your debt with others: Debt collectors may not share details about your debt with other people publicly. They are only allowed to contact others as part of the process to locate you. When they contact the third party, they are prohibited from disclosing the existence of a debt.⁹

What can debt collectors do?

While the FDCPA sets clear limits, debt collectors are legally permitted to take certain steps to recover a debt. Debt collectors can:

• Contact you directly to ask for payment: Debt collectors may reach out by phone, mail, email or text to ask for payment.
• Provide information about your debt: Debt collectors may give you details about the debt and the original creditor.
• Report debts to credit bureaus: Debt collectors may report a debt to the credit bureaus after following the required steps. The debt may then appear on your credit report and affect your credit score.

Can a debt collector take legal action?

If other collection efforts have failed, a debt collector may file a lawsuit to collect a debt. Depending on your state laws, your wages or bank account could be garnished, which is when a court orders that money from your paycheck or bank account be withheld to pay a debt.¹⁰

Many states have a statute of limitations — usually three to six years — that limits how long debt collectors can begin to take legal action to collect a debt.¹¹ After that point, it becomes “zombie debt.” Debt collectors can still ask you to pay it, but you can ask them to stop contacting you.¹² State laws vary, and it’s wise to consult with an attorney if you’re concerned about potential legal action or garnishment.

How can debt collection affect your credit score?

When unpaid debt is sent to debt collectors, it appears as a collection account on your credit report. A collection account can affect your credit score negatively for up to seven years after your first missed payment on the debt.

Ultimately, the effect of a collection account on your credit score depends on your credit history, how much you owe and which scoring model is being used.¹³ Over time, a collection account may have less impact on your credit score. Some newer credit scoring models may also treat paid and unpaid collection accounts differently. Others may ignore certain paid collection accounts entirely.¹⁴

---

---

Know your rights before you respond

Hearing from a debt collection agency can feel unsettling, especially if you weren’t expecting to be contacted by one. Taking time to verify the details can help you respond thoughtfully and feel more prepared for the conversation ahead. Once you know who is contacting you, what debt they’re asking about and what rights you have, you may be in a better position to decide what to do next.

Sources

1 https://www.creditkarma.com/credit/i/what-is-a-delinquent-account
2 https://www.experian.com/blogs/ask-experian/how-does-debt-collection-work/
3,5,6,8 https://www.experian.com/blogs/ask-experian/what-debt-collectors-can-and-cant-do/
4 https://www.investopedia.com/terms/d/debt-collector.asp
7 https://www.consumerfinance.gov/ask-cfpb/what-is-harassment-by-a-debt-collector-en-336/
9 https://www.ftc.gov/legal-library/browse/rules/fair-debt-collection-practices-act-text
10 https://www.dol.gov/general/topic/wages/garnishments
11 https://www.experian.com/blogs/ask-experian/time-limits-for-collection-agencies-to-collect-a-debt/
12 https://www.experian.com/blogs/ask-experian/what-is-zombie-debt/
13, 14 https://www.experian.com/blogs/ask-experian/credit-education/report-basics/how-and-when-collections-are-removed-from-a-credit-report/