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A call from a collection agency when you've fallen behind in your credit card payments, overlooked a medical bill or haven't paid the rent in a few months may come as an unwelcome surprise. A collection agency is a company lenders and creditors may use to recover funds that are in default or past due.
Knowing how to respond to a debt collector may improve your results and help take some of the stress out of the situation. Learning your rights, devising a strategy and managing communications can help you minimize damage to your credit and navigate the process of resolving your debt more deliberately.
How Does a Collection Agency Work?
Creditors bring in collection agencies when they've failed in their efforts to collect an outstanding debt, typically after 60 to 180 days. If a creditor has sent your debt to collections, they expect to receive only a portion of any money collected. For creditors, paying a collection agency is preferable to receiving nothing at all—or continuing the process of trying to collect your debt themselves.
There are two main 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: Creditors may sell your debt to a collection agency for pennies on the dollar and let the agency try to collect what they can.
Debt collectors only make money when they collect on your debt, so you can expect them to be persistent. 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.
Learn more: How Do I Know if I Have Debt in Collections?
What Are Debt Collectors Not Allowed to Do?
Third-party debt collectors must abide by the Fair Debt Collection Practices Act (FDCPA). If you're in the midst of a collection, it's worth familiarizing yourself with the many provisions of the law. Here's a sampling of the rules debt collectors must follow under the FDCPA:
- Calls: Collection agencies may only call you between 8 a.m. and 9 p.m. in your time zone. 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.
- Texts, emails and posts: Collection agencies must stop contacting you via text, email or social media if you ask them to stop.
- Legal representation: An agency can't contact you directly if you've notified them that you're being represented by legal counsel. All communications should be handled through your attorney.
- 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. They can't misrepresent themselves as agents of the government or attorneys.
- 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 falsely saying nonpayment of your debt will result in arrest or imprisonment.
Learn more: How to Negotiate With Debt Collectors
Do I Have to Pay a Collection Agency?
You are obligated to pay a valid debt, but you should take steps to verify it first. Above all else, make sure the collection agency that's contacting you is legitimate. Do not provide any personal or financial information to anyone who contacts you out of the blue without first making sure they aren't scammers. Before you agree to pay a collection agency, take these steps:
- Ask for a letter of verification. 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 the collection agency is legitimate.
- Confirm information on your credit report. Check your credit report for information on accounts in collection, to confirm that the information the agency provides is correct.
- Check the math. Make sure the amount the collection agency is requesting is accurate. Check previous bills and payments, and recalculate any interest or penalties to make sure you aren't being erroneously charged. If you can't verify the debt or believe the agency's information to be wrong, you have the right to dispute it within 30 days.
- Check with your state government's regulations. Every state has its own statute of limitations on debt collection. Find out what the law is in your state, then make sure you're still within the legal timeframe for the collection of past debts. Once the statute of limitations has passed, the collection agency can no longer sue you for your debt.
You have the right to dispute a debt if you don't believe you owe it or the amount is incorrect. Sending a letter within 30 days of initial contact requires the agency to stop collections until they respond to your dispute.
How Do Collections Affect Your Credit Scores and Reports?
Having an account in collections has a significant negative impact on your credit score, and it will stay on your report for seven years.
An account in collections usually isn't the beginning of credit troubles. Late and missed payments may already have factored into determining your credit score by the time your account is transferred to a collection agency. Late payments may be reported to all three major credit bureaus (Experian, TransUnion and Equifax).
Here are a few tips for managing your credit when your account goes to a collection agency:
- Check your credit report and credit scores. Check your credit as soon as you are contacted by a collection agency. You'll be able to see what information has been reported and how it might be affecting your credit.
- Consider contacting your original creditor. If your original creditor hasn't reported collections to the credit bureaus yet, you may be able to reach out and resolve the debt before a report is made. Note that once your account has been sold to collections, that debt is reported as a separate account on your credit report.
- File a dispute. If you believe any information related to a debt in collections is inaccurate, you have the right to file a dispute with the credit bureau maintaining the credit report where the information appears. Since collections have an impact on your credit report and scores, it can be worth disputing any errors you find.
Learn more: How Do I Get a Paid Collection off My Credit Reports?
Tips for Dealing With Collection Agencies
Dealing with debt collectors can be stressful, but you do have rights when dealing with collections agencies. 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. 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.
Tip: 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 Directly
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 contact from a collection agency catch you off guard. If you answer a phone call, don't have a lengthy conversation or agree to anything in an initial contact. Ask for a debt validation letter and set a time for a follow-up call. In the meantime, confirm the identity of the collection agency, validate the debt 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.
Learn more: How to Pay Off Debt in Collections
Frequently Asked Questions
Can a Collection Agency Sue You?
Yes, a collection agency can sue you. If your debt continues to go unpaid, they can ask the court to garnish your wages, freeze your bank accounts or place a lien on your property. If a collection agency sues you, you can hire an attorney, consider debt settlementor bankruptcy or challenge the lawsuit yourself.
Learn more: What to Do if You're Sued by a Debt Collector
Can a Collection Agency Garnish Your Wages?
If you've stopped paying a debt, a collection agency can go to court to request wage garnishment. If the request is granted, money may be taken out of your wages and used to pay off your debt over time.
Avoiding wage garnishment is one reason to try working proactively with a debt collector. Depending on your circumstances, you may want to pay off your debt, file an objection with the court, negotiate a payment plan or consider options like credit counseling or bankruptcy.
Does the IRS Use Collection Agencies?
Yes, the IRS sometimes uses private debt collection agencies to collect tax debt. In general, the IRS will refer debts to collection agencies when they are long past due and are no longer being actively pursued by the IRS.
That said, the IRS is aware of widespread IRS collection scams. To make sure a debt collector is legitimate, consider these IRS tips:
- Look for IRS notifications. The IRS will send written notification that your account is being transferred to private collections, and a second notification that this transfer has been completed. If you haven't received a written IRS notification, consider it a red flag.
- Beware of callers asking for immediate payment. Private collection agencies working with the IRS do not request payment on prepaid debit, iTunes or gift cards. Payments by check should be made out to the U.S. Treasury and sent directly to the IRS. You can also pay the IRS directly online through irs.gov/payments.
The Bottom Line
A collection agency can pursue your debt aggressively, impact your credit and seek legal judgments. However, they don't have unlimited power. By knowing your rights, being proactive and working toward the common goal of rectifying your situation, you can minimize the effects of dealing with a third-party collection and move on with your life.
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 day 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☉ Θ and irregularities that could be the result of fraud.
