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How Collection Agencies Work

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You may not know it when a debt collector calls, but some debt collection agencies want your money more than others.

That is, some agencies have bigger incentives than others for pushing you to pay.

There are two kinds of collection agencies: The ones hired by creditors to collect debts, and those that buy old debts from original creditors for pennies on the dollar.

Either kind of collection account could hurt your credit score.

But understanding the motivations and incentives of each type of debt collector can smooth your interactions with them.

Table of Contents:

  • Hired Collection Agencies
  • Agencies Buying Debt
  • How Collection Agencies Work
  • How Dishonest Collectors Work
  • What Can A Collection Agency Do?
  • How To Deal with Collectors

Hired Collection Agencies

Debt collection agencies are sometimes hired by lenders and other creditors to collect debts that are at least 60 days past due.

The more money a collection agency collects, the bigger cut it gets. An agency could score 25% to 45% of the amount collected. The rest goes to the creditor.

These agencies act as middlemen to collect all types of delinquent debts, including credit cards, medical bills, car loans or personal loan payments, student loans, and unpaid bills such as utility and phone bills.

The agency gets paid only when it collects money from you, and the more money the agency recovers, the more money it receives as payment for its services.

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Collection Agencies Buying Debt

The other type of debt collector is a debt buyer. These collection agencies buy debts from an original creditor that has given up on the delinquent account.

These kinds of debt collectors buy numerous accounts bundled together as a group.

Often, accounts grouped together have similar features: accounts that aren’t very old or haven’t already been sold to another debt collector.

Newer debts could fetch higher prices from a debt buyer than old accounts that other collectors have failed to collect on.

Debt buyers bid on packages of debts, so there’s no set price. Sometimes they pay only 4 cents for every $1 of debt.

An account with a $1,000 past-due balance would cost $40 to purchase at this price, for example, and every penny collected after $40 would be a direct profit for the debt buyer.

Debt buyers can also bid on debt by type. An old mortgage debt is worth more than a utility debt, for example.

When a debt buyer collects on one of your debts, it keeps all of the money because it owns the debt.

At that point, the original creditor is finished with the collection process.

This can make a debt buyer more unsavory, to put it nicely, in the methods it uses to collect debts.

However, you can use this tendency to your benefit when you know about it.

For example, you could offer to pay only a quarter of the balance due to settle the debt completely.

How Collection Agencies Are Supposed to Work

Reputable debt collectors are supposed to follow federal laws, including the Fair Debt Collection Practices Act and other consumer protection laws.

When contacting a debtor, a collector is supposed to be fair, respectful, and honest.

For example, consumers have the right to make a written request for debt validation.

This process is designed to verify that a consumer actually owes the past-due debt.

When you ask for debt validation, the debt collector is supposed to suspend its collection process and send you a written notice of the amount owed, the company owed, and how to pay it.

If the debt can’t be verified by the collector, it should stop trying to collect it and delete the negative items from your credit reports with all three credit bureaus — Experian, Equifax, and TransUnion.

If the debt collector doesn’t own your debt, it should tell the original creditor that it has stopped trying to collect because it can’t verify the debt.

An honest and reputable debt collector will try to get accurate and complete records so they don’t go after people who don’t really owe money.

If you tell them you were the victim of identity theft, they should try to verify your claim.

How Dishonest Collectors Work

Unscrupulous debt collectors, however, may violate the Fair Debt Collection Practices Act, or FDCPA, or come close to breaking it.

Debt collection is the financial product or service most complained about to the Consumer Financial Protection Bureau, according to CFPB reports. Specific complaints include:

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  • Being contacted about debts no longer owed.
  • Accounts forwarded to third-party collectors without any notice from an original creditor about an outstanding balance.
  • Bothered by frequent daily phone calls by debt collectors at home and at work.
  • Use of contact information the consumer has asked the collection agency to stop using.

Debt collectors tend to be pushy because they have one goal: to make borrowers pay on old debts.

To meet this goal they may resort to breaking the law or at least coming close to violating the FDCPA.

When debtors don’t know their consumer rights, they don’t know when a debt collection agency breaks the law.

What Can a Collection Agency Do?

The Federal Trade Commission, or FTC, enforces the FDCPA, the main law limiting what debt collectors can and can’t do.

The law prohibits debt collectors from using abusive, unfair or deceptive practices to collect money.

Here are some of your protections under that law:

  • Calling at all hours: A debt collector can’t contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m. They can’t contact you at work if you tell them you’re not allowed to take calls there.
  • No pretending: They can’t pretend to be someone else when contacting you, such as an attorney or government agency. They also can’t falsely represent that they work for a credit reporting company.
  • No harassment: Harassment, threats and deception are illegal. This includes using profanity, threats of violence, calling repeatedly, saying you’ll be arrested if you don’t pay your debt or that they’ll garnish your wages unless permitted by law to do so.
  • Limits on contacting others about your debt: Debt collectors may contact people you know, but they can’t discuss your debt with anyone other than you, your spouse, or your attorney. They can contact other people to find out your address, home phone number and where you work. They’re usually prohibited from contacting third parties more than once.
  • Written notice: Every collector must send you a written “validation notice” telling you how much you owe within five days of first contacting you. It must include the name of the creditor and how to proceed if you think you don’t own the money.
  • Unfair practices: Collectors can’t engage in unfair practices when trying to collect a debt. These include trying to collect any interest, fee or other charge on top of the amount owed unless state law allows the charge; deposit a post-dated check early; take or threaten to take your property unless it can be done legally; contact you by postcard.

How to Deal With Collectors

To best deal with a debt collector, you have to know your rights.

Tell the agency not to call you at work. Ask for written notices only, and report the agency to your state attorney general’s office, the Federal Trade Commission, and the CFPB if you think an agency has violated the law.

You also have the right to tell the collector not to contact you ever again, even if the debt is legitimate.

This may not be the best idea since a creditor or debt collector could still sue you for repayment, at least until your state’s statute of limitations on the debt expires.

Send Letters Via Certified Mail

Sending a letter to the collector telling them not to contact you again won’t erase the debt, but it should stop the unwanted phone calls.

When you write to a debt collector, send your letter by certified mail and pay for a “return receipt” so you can document when the collector received it.

Make a copy of the letter for yourself, too.

Once received, the collector can contact you only in two instances: letting you know they’re filing a lawsuit or other specific action, or to tell you there will be no further contact.

Be Aware of Time-Barred Debt

It’s also worthwhile to know the statute of limitations in your state on when legal action can be filed over unpaid debts.

Each state limits a debt collector’s right to sue you for repayment. Statutes of limitations range from three to 10 years depending on your state.

After the time has elapsed in your state, you’re no longer exposed to legal action as a method of repayment — no matter how many times a debt collector calls.

But there’s one big caveat. If you make a payment on a debt, even a small amount, then the time limit on debt collection lawsuits may be extended.

A payment resets the clock on time-barred debt.

So if you make a payment or start a new payment plan, make sure it cancels the debt completely.

Monitor Your Credit Score

You should always keep an eye on your credit score, but pay extra attention when you’re dealing with a third-party collection agency.

Collection accounts can hurt your credit score more than many other negative items including late payments or even missed payments.

When you agree to make a payment or start a payment plan, try to make your payment contingent upon the debt collector removing its negative remarks from your credit history.

To make sure the collection agency keeps its word, you should pull your own credit reports at

Because of the coronavirus pandemic, you can get a free credit report from each credit bureau once a week.

After April of 2021, is scheduled to return to giving once-a-year access to your credit reports.

Know How Collection Agencies Work

Like I said at the top of this post, your collection agency may have a greater incentive to encourage payment from you.

If the debt collection agency you’re dealing with has bought your old debt, it can profit more from your repayment.

It won’t be sharing the money with an original creditor.

This often means debt buyers have more incentive than middleman agencies. But owning the debt can also give debt buyers more flexibility.

They can afford to take a smaller portion of your balance because they don’t have to answer to the original creditor.

Either way, finding out how your collection agency works can help you negotiate.

What’s been your experience with collection agencies? Let us know down in the comments.

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