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What Is a Debt Collector?
A debt collector is a person or organization hired to recover overdue payments on behalf of creditors. They usually earn either a flat fee or a percentage of the amount they collect and may also purchase debts at a discount to collect the full balance.
Debt collectors typically contact debtors through phone calls, letters, or emails to pursue unpaid credit cards, medical bills, or loans. Their practices are regulated under the Fair Debt Collection Practices Act (FDCPA), which protects consumers from harassment and unfair tactics.
Key Takeaways
- Debt collectors recover money owed on delinquent accounts for creditors, often for a percentage of the collected amount.
- Debt collectors must follow the Fair Debt Collection Practices Act (FDCPA) to protect consumers from abusive practices.
- Some debt collectors purchase debts for a fraction of their value and try to collect the full amount.
- Collectors are restricted from contacting debtors at inappropriate times and making threats or false claims.
- Debtors can request that collectors stop contacting them and have the right to dispute inaccuracies.
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How Debt Collectors Operate and Communicate With Debtors
When a borrower defaults on a debt, the lender or creditor may turn their account over to a debt collector or collections agency. The debt is said to have gone to collections at this point. This typically happens within three to six months of default, depending on the creditor. Overdue payments on credit cards, phone bills, auto loans, utility bills, and back taxes are examples of debts for which collectors may be responsible.
Debt collectors may contact debtors through mail or phone, including at work. In some cases, they may visit the debtor’s home. They might also reach out to family and friends to verify contact information.
If the person agrees to pay the debt, the creditor will usually pay the debt collector a percentage of the money it gets back, unless they have a flat-fee arrangement.
Some agencies buy delinquent debt from creditors, usually at a low price, and then try to collect the full amount for profit. Successful collectors keep all the money they collect.
Important
There are different types of debt collectors. In-house debt collectors are employees of the creditor. Third-party debt collectors work for outside agencies that are specifically in the business of collecting other parties’ debts.
Legal Rules and Consumer Protections for Debt Collection
The Fair Debt Collection Practices Act (FDCPA), overseen by the Federal Trade Commission (FTC), regulates debt collectors. In effect since 1978, this law protects consumers from abusive, unfair, or deceptive collection practices, including:
- Collectors are not allowed to contact debtors before 8 a.m. or after 9 p.m.
- Collectors cannot claim that a debtor will be arrested if they fail to pay
- Collectors cannot call more than seven times within a seven-day period
- Collectors can’t physically harm or threaten debtors
- Collectors cannot seize assets without the approval of a court
The law also gives debtors certain rights. For example, if you send a letter to a debt collector telling them to stop contacting you, the collector is required to comply. This means they must stop contacting you in any way, including over the phone or in writing.
The Consumer Financial Protection Bureau (CFPB) issued a new Debt Collection Rule in 2021 that further clarifies what debt collectors can and can’t do. For example, when a debt collector first contacts the debtor in any way, it must provide certain information, such as the debt collector’s name and address, the creditor’s name, the associated account number, and the amount and itemized accounting of the debt. They must also provide information on the debtor’s rights and how they can dispute the debt if they believe it is inaccurate.
People who think a debt collector has broken the law can report them to the FTC, the CFPB, and their state attorney general’s office.
Tip
Debt collectors are not allowed to disclose information about your debt to another individual, such as a family member, friend, neighbor, coworker, or employer, without your express consent. You can file a complaint with the FTC, CFPB, or your state attorney general’s office if you have trouble with a collector. You also have the right to sue the debt collector in state or federal court.
Real-World Scenario: How Debt Collectors Work
Here’s a hypothetical example to show how debt collectors work. Let’s assume that Jesse owes ABC Bank $15,000 on a credit card. They’ve missed six months’ worth of payments because they’re overwhelmed by debt. The credit card issuer makes several attempts to try to collect on the arrears through its in-house collection department. After the last attempt, the bank closes the card and sends Jesse’s account to a third-party collection agency to assume collection activity.
Once the account arrives, the collection agency sends a letter to Jesse advising them that it is now responsible for collecting on the account. The agency may send letters and attempt to collect the debt by contacting Jesse over the phone.
If the activity is successful, the agency may get a fee or a percentage of the outstanding balance. The rest is sent to the original creditor and the account is considered paid in full.
Do Debt Collectors Report Information to Credit Bureaus?
Yes, a debt collector may report a debt to the credit bureaus, but only after it has contacted the debtor about it. The delinquent debt may also be reflected on the person’s credit report under the name of the original creditor. Both can remain on credit reports for up to seven years and have a negative effect on the individual’s credit score, a large portion of which is based on their payment history.
Does the Fair Debt Collection Practices Act Cover Business Debts?
No, the Fair Debt Collection Practices Act applies only to consumer debts, such as mortgages, credit cards, car loans, student loans, and medical bills.
Does the Internal Revenue Service Use Debt Collectors?
Yes, the Internal Revenue Service (IRS) uses private agencies to collect outstanding tax debts in some instances. When that happens, the IRS sends the taxpayer an official notice called a CP40. Because scams are common, taxpayers should be wary of anyone purporting to be working on behalf of the IRS and check with the IRS to make sure.
Are Debt Collectors Licensed?
Whether a debt collector is licensed depends entirely on the state where they’re employed. Some states have licensing requirements for debt collectors while others do not. All debt collectors in the U.S., whether licensed or not, must comply with the federal Fair Debt Collection Practices Act, and some states have specific laws in place to regulate collectors and protect resident borrowers.
The Bottom Line
Debt collectors help creditors recover delinquent consumer debts, whether in-house or through third parties, but their actions are regulated under the FDCPA. This law prohibits harassment, false statements, and unfair tactics, giving consumers the right to dispute debts and report violations to the FTC, CFPB, or state authorities.
Debt collection can affect credit scores, making it very important for consumers to understand their rights. Recent updates, such as the CFPB’s 2021 Debt Collection Rule, have further strengthened transparency and protection in the process.
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