By JR Rooney
What is a collection company?
There are a few possibilities.
Some creditors will try to deceive a debtor by using a DBA'ed company name, address, and telephone number for their internal collection department. They want to give the impression of an "outside" agency hoping the debtor will take it more seriously. This strategy is generally only used when the debt is not older than six months old.
However, most collections activity is performed by a third-party collection company, which are separate from the original creditors, and "work" debts on behalf of various lenders. They may also buy bad debts which have been designated as charge-offs by the original creditor.
This FAQ focuses on third-party collection companies.
How do they make money?
3rd party collection companies often work on a contingency bases, where they receive a percentage of the amount that they collect. Individual collectors are often paid a low base salary plus bonus based on their personal goals.
Many collection companies purchase substantial debt portfolios of charged-off accounts for a fraction of the total face amount (total amount outstanding) After a portfolio is sold off, the debtors now owe the entire amount to the purchasing company. The probability of collecting money decreases substantially over time, an agency might only pay 1% - 5% of face value. The agencies' profits come from the difference between the purchase price and the amounts that are hopefully collected.
How does the collection process work?
The main tools of a collection company are dunning notices and phone calls.
What are the letters like?
The dunning letters are computer-generated, and are often in a standardized series which starts with a non-threating, "reminder" tone, and may progress to ultimatums. The letters are pre-written and sent to many debtors; they are not personal.
The initial demand letter must state that the recipient has the right to dispute the validity of the debt (in writing), and the agency must send some confirmation after verifying it with the original creditor. Demand letters must also contain the statement that they come from a debt collector, and that any information gathered will be used for the purpose of collecting the debt. Collectors are not legally allowed to print anything on the outside of the envelope which indicates or suggests the nature of the communication. The return address must also be discreet, so many companies will just use their company's initials, or some other nondescript name.
The debtor's reaction to the notice will affect which additional notices the company will select from its library. Cooperation (e.g. making payment arrangements and/or partial payments) may result in letters with a gentler tone. Shifty or unfavorable reactions from the debtor may result in a more threatening tone.
Debt Collectors strive to create a sense of urgency, to try and collect the debt within the shortest amount of time. This hopefully will instigate the debtor to prioritize that particular past due account. Deadlines may be set, such as, Pay this amount within 10 days or there may also be threats, such as, ...Or we will proceed with further collection efforts. But most of the time, if a debtor fails to meet the demand, all that will happen is that yet another dunning notice will arrive, making the same basic threats. The & further collection action usually just means more dunning letters.
Collection letters will always coax the debtor to call the collection company directly via the telephone. If the debtor doesn't call within thirty days, then a collector will usually attempt to contact the debtor again.
What are the telephone calls like?
Individual phone collectors may be assigned a portfolio of accounts, and spend the bulk of the workday, every day, working them. The collectors devotion is fueled by frequent performance evaluations and personal commission payments. The size of a collector's own paycheck is dependent upon how much money s/he extracts from debtors. Between that factor, and the relentless confrontations, this is a very high-stress job, with high employee turnover.
If a debt collector calls and reaches someone other than the debtor (e.g. a friend), s/he is legally prohibited from disclosing That this is an attempt to collect a debt. Every state is different but this may or may not include the debtor's spouse. If the collector reaches an answering machine or voice mail, s/he will often leave a FDCPA approved message, but is prohibited from giving details for the call, since someone besides the debtor might hear it. The basic message goes something like, "I am calling for Jane Doe. It is very important that you call me back. My name is JR Rooney, and my number is 1-631-776-8109." S/he will typically sound rather unemotional and stiff. Collection companies may be required to provide a phone number which is free for the debtor to call. They also may attach their toll free numbers to caller ID equipment which instantly identifies and logs the phone number the debtor is calling from, in order to call the debtor at that number at a later date.
When speaking with a debtor, many collectors (especially those without much experience) will use a script, which contains a pre-written introduction, request for payment, and has various branches to follow, depending on how the debtor responds. If a particular debtor is taking up too much time, without making arrangements to pay, the collector will be inclined to move on to other accounts.
Any information that the debtor gives about his/her financial situation (e.g. income or current employment, etc.) will be noted on the file's record and used to estimate the probability of a recovery, the advantage of legal action, and so forth.
But what can the collection company actually do?
If they are working the debt on commission, they can send some more form letters and make some more scripted phone calls.
They can also report the item as refusing to pay with the credit bureaus. And if they are working on 100% contingent bases, they can recommend going legal, or if they own the debt outright, they can sue it themselves. However, the actual chances or intentions of this are often significantly less than they try to suggest to the debtor.
Collection companies can not legally seize a debtor's assets, bank accounts, or garnish wages unless there has already been a successful lawsuit with a judgment awarded in there favor.
Collection companies can not legally make any kind of public announcements or disclosures concerning the debt, except to the credit bureaus.
Collection companies can not legally get a debtor fired from his/her job.
Collection companies can not legally act in any type of physical violence or threats.
Why would a debtor pay?
Many times the reasons include fear, guilt, intimidation, and a lack of understanding of the legal remedies available. Plus it is the right thing to do.
The debtor may feel guilty and ashamed of being a "deadbeat," and may perceive a judgment of his/her value as a person.
The debtor may have greatly exaggerated ideas about what collectors are (legally) capable of doing, and may have outdated stereotypes in mind.
The debtor may be in fear by the ferocious, tenacious, demands, from collection companies that may seem so in control. S/he may take it personally, and assume that great individual attention is being given to there case.
Consumers being contacted by collection companies are typically in serious financial difficulty, and under emotional stress about the general situation, so they may be confused and vulnerable.
Some debtors aren't aware of their legal rights, and feel hopeless.
There are two basic things that a collection company can actually do that a debtor should be concerned about. These involve negative info being reported to the credit bureaus, and the unlikely possibility of a lawsuit.
What about credit reports?
Third-party collection companies may report a debt to one or more of the credit bureaus, as a "Collection Account," including the amount, and whether it was paid or not. Paying off a collection account will not result in the item being removed from the consumer's credit reports - it will simply be marked "Paid." Agencies can report both debts that they have bought, and also debts that they are working on behalf of the actual creditor.
Also, a collection company may request a debtor's credit file, in order to get an idea of his/her general financial situation, and to get an updated address and phone number.
How long do collection accounts last?
Collection accounts are subject to the normal 7 year time limit for appearing on a credit report. As specified in Section 605 of the FCRA this time limit is based on the date of the original delinquency.
What is the probability they will sue the debtor?
If the debt still belongs to the original creditor, a 3rd party collection company cannot file a lawsuit. But if the balance is large enough and the debtor is being resistant and if there are indications that the debtor has vulnerable assets, the agency may send the account back to the creditor with a recommendation to file suit. Every creditor has its own criteria for the final decision; for example, the amount must be substantial (often $1500 or more, at the very least.)
Collection companies tend to avoid sending too many accounts back, since it suggests that they aren't very good at collecting. Also, letters and phone calls are much less expensive than going to court.
If a collection company has purchased the debt, then they have the ability to file suit, but in most cases, the debt is likely to be rather old, and the agency doesn't have much money invested into it.
Fear and intimidation are a collectors cheapest tools, since those things can work much more quickly, cheaply, and efficiently than filing suit.
Lawsuits certainly are brought against plenty of debtors, but not nearly as often as debtors fear. There is a big difference between, "Pay up or we will continue with collection action," compared to an actual Summons And Complaint.
If the debt is substantial and recent, and the debtor appears to be a good target (e.g. reasonable assets or income), a lawsuit is a real possibility. If you are served with legal documents specifying a particular court, hearing date, etc., you should see a qualified attorney immediately. That area is beyond the scope of this FAQ.
How are collection companies regulated?
The most important law is the Fair Debt Collection Practices Act (FDCPA), which places many restrictions on collection activities. The FDCPA only covers third-party collection companies, not original creditors.
Every state has applicable laws regarding such things as telephone harassment.
Who enforces the FDCPA?
The Federal Trade Commission oversees the collections industry, and has the authority to impose fines or other penalties for violations. However, the FTC does not get involved with individual consumers' cases. They accept a large number of complaints, and look for patterns of violations which could then lead to action against a particular collection company.
What if a collection company ownes the debt?
The agency then becomes the creditor for most purposes. The debtor will not be able to make any negotiations with the original creditor. The agency might be technically able to file a lawsuit against the debtor, (although this is not likely.)
However, the Federal Trade Commission has issued a Staff Opinion Letter which indicates that, even if a collection company has purchased a debt, it is still covered under the Fair Debt Collection Practices Act as a "third-party debt collector."
What about the relevant time limits?
The debt does not become some kind of "new" debt just because of being sold. For example, the seven-year credit reporting time limit is still based on the original delinquency date with the original creditor. The statute of limitations for filing lawsuits is also based on that same date. These limits can not be legitimately "reset" by a collection company that has bought the debt.
However, the statute of limitations may possibly be reset if the debtor makes a specific promise to pay, or a partial payment.
Can the collection company do anything after the time limits are up?
Yes. The statute of limitations only covers the filing of lawsuits, and the credit reporting time limit only covers bureau listings. There is no time limit on letters and phone calls.
A collection company that has purchased a bundle of "out-of-statute" debts (where the SOL has already expired, or "run") is hoping that, either the debtors will feel guilty, or that they won't be aware of that "out-of-statute" status. But if a particular debtor makes it clear that s/he understands the legal situation, then the collectors are likely to give up and move on to easier targets.
Can collectors call the debtor's place of employment?
Yes, but there are limitations. For example, they can not legally tell your employer about the debt, or try to have you fired.
Is there any way to make them stop calling?
Yes. According to section 805 of the Fair Debt Collection Practices Act:
"(c) CEASING COMMUNICATION. If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt, except --
(1) to advise the consumer that the debt collector's further efforts are being terminated;
(2) to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or
(3) where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.
If such notice from the consumer is made by mail, notification shall be complete upon receipt."
So the consumer can just send a 3rd party collection company a written notice (preferably citing the FDCPA), ordering them to stop the collection letters and calls, and the company is legally obligated to comply. The only permissible contact thereafter is to notify the debtor of specific "remedies," like legal action, but usually the collectors won't even bother.
If the creditor hasn't yet made a decision on whether or not to file a lawsuit, then that decision may be made at this point, rather than being delayed.
After a "cease and desist" notice from the consumer, the debt may then be returned to the original creditor, passed on to another third-party agency, or simply filed away, depending on the circumstances. The agency may still report the account to the credit bureaus.
