Collection Agency: Definition, How It Works, and Regulations

Key takeaways

• A collection agency is a company hired by lenders or creditors to recover overdue funds or manage accounts in default.
• Creditors may hire agencies or sell debt to them; if sold, the agency becomes the new creditor.
• Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA), which limits how they may contact and treat debtors.
• Unpaid collections can lower your credit score and remain on your credit report for up to seven years.

What a collection agency is

A collection agency collects past-due debts on behalf of lenders or creditors, or it may purchase charged-off debt outright. Creditors typically involve an agency after repeated failed attempts to collect, often once an account is 60–90 days past due.

How collection agencies work

• Creditors either hire an agency to attempt recovery or sell the debt to an agency for less than the original balance.
• If you pay after being contacted, the creditor usually pays the agency a percentage of the recovered funds per their agreement.
• If you don’t pay, the agency can report the account as a “collection” to the credit bureaus (Equifax, Experian, TransUnion), which can significantly lower your credit score. A collection entry can remain on your credit report for seven years from the date of delinquency.

Common collection methods:
* Calling personal and workplace phone numbers
Mailing late-payment notices
Contacting friends or family to confirm your contact information
* Visiting the debtor’s residence

What collection agencies can and cannot do (FDCPA highlights)

Third-party collection agencies are bound by the Fair Debt Collection Practices Act. Key restrictions and allowed practices include:

What a debt collector may not do:
* Attempt to collect debts that are legally uncollectible due to bankruptcy or when the creditor cannot locate the debtor.
Seize assets or garnish wages without first winning a lawsuit and obtaining a court order.
Threaten or physically harm a debtor.
Contact you at work if you have told them your employer disallows such calls.
Contact you more than seven times in a seven-day period (as stated in the source material).

What a debt collector may do:
* Attempt to collect debts even after the statute of limitations has expired if allowed by state law (statutes typically run about four to six years from the first day of default).
Call between 8 a.m. and 9 p.m.
Contact an employer about overdue child support, alimony, federal student loans, or taxes.

Lawsuits and legal consequences

A collection agency can sue you to recover a debt. If the collector wins, the court may permit:
* Garnishment of wages
* Seizure of funds from bank accounts
Failure to comply with court orders related to a debt lawsuit could result in further legal actions, including potential arrest in some circumstances tied to contempt or warrants issued by the court.

If you’re contacted by a collection agency

• Verify whether the debt is yours and request verification if needed.
• Review whether the statute of limitations has expired in your state.
• If you can pay, settling the debt typically improves your situation—payments stop collection activity and can help begin credit repair.
• If you cannot pay, seek legal or financial counseling. In some situations, bankruptcy may be the appropriate option.

Is it worth paying a collection agency?

It depends on your circumstances. Paying can:
* Stop collection activity and reduce the risk of a lawsuit.
* Help repair credit over time.
If paying is not feasible, obtain professional advice on alternatives, including negotiations, settlement, or bankruptcy.

Summary

Collection agencies help creditors recover overdue debts or manage charged-off accounts. They must follow FDCPA rules that limit how and when they can contact debtors and prohibit abusive practices. Unpaid collections can severely impact credit for up to seven years, and collection agencies may pursue legal action. If contacted, verify the debt, know your rights, and consider paying, negotiating, or seeking professional advice depending on your financial situation.