What Happens When a Debt Is Sold to a Collection Agency
A Comprehensive Look at the Debt Collection Process
Dealing with debt can be stressful – and things get even more complicated when your debt gets sold to a collection agency. If you‘re in this situation, it’s important to understand what’s happening and know your rights. In this article, we’ll break down the process step-by-step so you can feel prepared.
Understanding Debt Buyers and Collection Agencies
First, let’s clarify some terminology. A debt buyer is a company that purchases delinquent or charged-off debts from original creditors for a fraction of the amount owed. The debt buyer then attempts to collect the full balance from the consumer, keeping any amounts collected above what they paid as profit.A collection agency, on the other hand, is hired by the original creditor to recover the debt on their behalf for a fee or percentage of what’s collected. Collection agencies do not own the debt themselves.Both debt buyers and collection agencies use various tactics to try to get consumers to pay up. We’ll cover some of the most common ones later.
-Why Debts Get Sold
There are a few key reasons why original creditors choose to sell off delinquent debts to third parties:
- It allows them to get at least a partial recovery on the amount owed
- It frees up their resources from having to pursue collections in-house
- Selling the debt removes the liability from their books
From the creditor’s perspective, getting even a small percentage upfront from a debt buyer is better than potentially never recovering anything at all from the delinquent consumer.For debt buyers, purchasing large portfolios of charged-off debt for pennies on the dollar represents an opportunity to turn a profit if they can collect more than they paid. It’s a classic risk vs. reward scenario.
The Debt Sale Process
So how exactly does a debt get sold off to a third party? Here‘s a general overview:
- The original creditor charges off the debt after multiple missed payments, typically 180 days of delinquency.
- They package up portfolios of these charged-off accounts and sell them at a steep discount to debt buyers through an auction or direct negotiation process.
- The debt buyer purchases the portfolio, becoming the new owner of those debts. They pay a fixed amount upfront for the rights to collect the full outstanding balances.
- The debt buyer then deploys its collections tactics and resources in an attempt to recover as much of the debt as possible from consumers.
It’s a high-volume, high-risk business model. Debt buyers bank on being able to collect more in total than what they paid for the portfolio.
-Your Rights When Dealing With Debt Collectors
If a debt collector starts contacting you, it’s crucial to understand your rights under the Fair Debt Collection Practices Act (FDCPA). This federal law prohibits debt collectors from using abusive, deceptive, or unfair practices when attempting to collect a debt.Some key consumer protections under the FDCPA include:
- Debt collectors cannot call you before 8am or after 9pm
- They cannot use profane language or threaten violence
- They must identify themselves as debt collectors in every communication
- They cannot discuss your debt with others without your permission
- They must provide validation of the debt if you request it in writing
If a debt collector violates the FDCPA, you have the right to sue them in state or federal court. Statutory damages can be up to $1,000 plus attorney fees.It’s also important to note that the FDCPA only applies to personal, family, and household debts – not business debts. Some states provide additional consumer protections as well.
Common Debt Collection Tactics to Watch Out For
Now that we’ve covered some of the basics, let’s look at the kinds of tactics debt collectors often use to try to compel payment. Being aware of these can help you avoid being misled.
Repeated Phone Calls and Letters
One of the most common collection tactics is persistent phone calls and letters demanding payment. Debt collectors know that frequent contact and an unrelenting barrage of requests can eventually wear some people down.They may start out polite but quickly escalate to more aggressive language if payments aren‘t made. And they‘ll often call from multiple numbers to get through.
Threats of Legal Action or Wage Garnishment
Another favored tactic is threatening legal consequences like a lawsuit or wage garnishment if the debt isn’t paid. While these are certainly possible outcomes, collectors often make them sound much more imminent than they really are.The reality is that actually suing a consumer is expensive and time-consuming for the collector. It’s often an empty threat used as a scare tactic, at least initially.
-Offering to Settle for a Lump Sum
On the other hand, some collectors may try a more friendly approach by offering to settle the full debt for a substantial lump-sum discount. For example, they might agree to accept $2,000 to wipe out a $5,000 debt.This can seem enticing, but be wary – the settled amount may still be reported to the credit bureaus as “settled for less than full balance,” which can damage your credit score.
Reselling the Debt Again
Finally, if their in-house efforts fail, some debt buyers may simply re-sell the debt to another buyer at an even steeper discount. This restarts the cycle all over again with a new collector hounding you.The debt could potentially be sold and resold multiple times over many years if it remains unpaid. Each new owner is entitled to attempt collection under the FDCPA.
Negotiating With Debt Collectors
If a debt collector is contacting you about an outstanding debt, you have several options for how to respond:
-- Request debt validation: You can send a written request within 30 days asking the collector to validate the debt with documentation. This can buy you some time and ensure you’re dealing with a legitimate debt.
- Negotiate a settlement: You may be able to negotiate a lump-sum settlement for less than the full balance, especially if the debt is older. Get any settlement agreement in writing first.
- Request a payment plan: If you can’t afford a lump sum, see if the collector will accept a payment plan you can manage. Be sure to get this in writing as well.
- Dispute the debt: If you have grounds to dispute the debt’s validity or amount, you can send a written dispute letter. The collector must then provide verification before continuing collections.
- Wait for the statute of limitations: Each state has a statute of limitations on how long a debt is legally collectible. If the debt is past that date, you may have grounds to simply wait it out.
The key is to avoid ignoring the debt collector entirely, as that can prompt escalated tactics or potential legal action. Respond in writing and negotiate in good faith if possible.
Rebuilding Your Credit After Debt Issues
Having a debt go into collections and get sold off to a third party can severely damage your credit score and make it harder to get approved for loans, credit cards, rentals, and more.But there are steps you can take to start rebuilding your credit over time:
- Check your credit reports: Request your free annual reports from the three major bureaus and dispute any errors you find.
- Pay any outstanding debts: Whether in full or settling for less, paying off collections accounts can help improve your score.
- Become an authorized user: See if a family member with good credit will add you as an authorized user on their credit card.
- Apply for a secured credit card: These require a refundable deposit that then becomes your credit limit. Use it responsibly to build credit.
- Consider credit repair services: Reputable companies like Lexington Law can help you dispute errors and negotiate debt settlements.
The key is to establish a pattern of consistent, on-time payments on any new credit accounts you open. Over time, this positive payment history will raise your credit scores.
When to Seek Legal Help
In some situations, you may want to consult with a qualified debt settlement attorney or consumer protection lawyer, such as those at Spodek Law Group. An attorney can:
- Evaluate the validity and age of the debt being collected
- Determine if the statute of limitations has expired in your state
- Advise you on your rights under the FDCPA and state laws
- Send cease and desist letters to stop harassment from collectors
- Potentially negotiate more favorable debt settlement terms
- Defend you in court if a collector does file a lawsuit
Having experienced legal representation can provide peace of mind and protect you from unscrupulous collection practices. Many attorneys provide free initial consultations as well.
Tips for Avoiding Future Debt Issues
Of course, the best way to steer clear of debt collectors is to be proactive about managing your debts responsibly from the start. Here are some tips:
- Live within your means and avoid taking on more debt than you can handle
- Pay all bills on time every month, even if it’s just the minimum amount
- Negotiate with creditors if you’re struggling to make payments due to hardship
- Check your credit reports annually and dispute any inaccuracies
- Avoid opening too many new credit accounts in a short period of time
- Have a plan for paying down balances instead of just moving debt around
By being a disciplined borrower and consumer, you can minimize the chances of your debts ever being sold off to third-party collectors.