How Does Debt Collection Work?

What Is Debt Collection?

Debt collection is a process where an internal collections department, a third-party debt collection agency or debt buyer attempts to collect payment on an overdue account. Credit card balances, rent payments, phone bills, car loan payments and medical bills are examples of debts that may go to collections. You may also be contacted by a debt collector if an account you cosigned goes into collections.

Unpaid accounts don't automatically go into collections, though the timeline may vary with each type of debt. Here's generally how your account status may evolve:

• Late payment: Creditors often consider your payment late the day after it's due, but they won't report it to the credit bureaus until the account goes unpaid for at least 30 days. The creditor will typically try to contact you by phone, mail or electronic message to discuss payment.
• Account in delinquency: Once a full billing cycle elapses without payment, your original creditor will likely flag the account as delinquent. The delinquency is typically noted on your credit reports and may negatively affect your credit scores. Your creditors may also continue contacting you about repayment.
• Balance charged-off: Your creditor may eventually charge off the account when it's delinquent for an extended period of time, typically six billing cycles. A charge-off means the creditor has given up hope that you will repay your debt and closed your account. It will appear on your credit report as a "charge-off."

Once an account is charged off, a third-party debt collection company may contact you to recover the money owed on your delinquent accounts. You will no longer communicate with the original creditor but will now solely deal with a debt collector instead.

Learn more: What Types of Debt Can Go to Collections?

What Happens When Your Debt Goes to Collections?

Debt collectors have to follow a specific set of steps to recover the balance owed. Here's what happens when debt goes to collections:

1. Debt Collector Contacts You

A debt collector starts by contacting you to inform you of the debt and collect payment. This may happen via phone call, text message, private message on social media or physical mail. If this occurs, ask questions to make sure the debt is legitimate. Never give away sensitive financial information until you've confirmed the caller is legitimate.

2. Debt Collector Provides a Validation Notice

By law, the debt collector must provide you with a validation notice within five days of the first attempt to contact you. The collection agency may send the notice electronically or by mail. It's intended to ensure the debt is yours and inform you of your rights to dispute the debt if it isn't.

The validation notice typically includes:

• Name and mailing information of the debt collector
• The amount of the debt owed that reflects interest, fees, payments and credits since a particular date
• The current amount of the debt as of when the validation notice is provided
• The original creditor's name
• The account number associated with the debt
• How to dispute the debt if you don't feel it's yours

Learn more: What Is a Debt Validation Letter?

3. You May Dispute the Debt

You may dispute the debt if you don't think it's valid. You have 30 days to do this in writing from the date you received the validation notice.

In your dispute, you'll state the reason for your dispute, such as you don't recognize the account or the amount in question. Once the debt collector receives your letter, they must send you verification of the debt before further attempts to collect on it.

4. Debt Collector Attempts to Collect the Debt

If the debt is valid, the debt collection agency or debt collector will make every attempt to collect on the debt you owe. They're legally allowed to get in touch with you and request payment. That said, debt collection is regulated at the federal and state levels, and you have rights that debt collectors must honor.

Some of the steps they may take during the debt collection process:

• Call you at home or work
• Mail, text or email payment notices
• Contact you privately through social media
• Show up at your front door
• Contact your friends or family to confirm your contact information

Learn more: What Debt Collectors Can and Can't Do

What Is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (FDCPA) governs debt collection practices and forbids debt collectors from using deceptive, abusive or unfair means to collect a debt. If a debt collector violates the conditions laid out by the law, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB) or take the debt collector to court.

The FDCPA and state laws also govern the statute of limitations, or how long a creditor or debt collection agency can legally file a lawsuit to recover the debt. Most statutes of limitations range from three to six years, although they may extend for longer in some states.

What Debt Collectors Can Do

Under the FDCPA, debt collectors are allowed to take certain actions to recover a debt, as long as they follow strict legal guidelines. They can:

• Contact you about the debt by phone, mail, email or text during permitted hours (generally between 8 a.m. and 9 p.m.)
• Send a written validation notice with details about the debt, including the amount owed and the original creditor
• Request payment and work with you to set up a repayment plan or settle the debt
• Report the debt to the credit bureaus, which may affect your credit scores
• Contact other people to locate you, such as reaching out to your employer or relatives for your contact information (but not discussing the debt)
• File a lawsuit to collect the debt if it's within the statute of limitations
• Seek a court judgment, which could allow actions like wage garnishment or bank account levies, depending on state law

What Debt Collectors Cannot Do

Under the FDCPA, a debt collector cannot:

• Threaten violence or use other criminal means to harm you, your property or reputation
• Use profane or obscene language
• Publish your name, except to a consumer reporting agency
• Advertise a debt for sale to coerce payment
• Abuse, annoy or harass you by repeatedly calling you at any time, day or night or before 8 a.m. or after 9 p.m.
• Call you without properly identifying themselves, except to obtain your address
• Use any false, deceptive or misleading representation
• Use unfair or unconscionable means to collect or attempt to collect a debt

How Debt in Collections Affects Your Credit

Once you receive a validation notice from a debt collector, they can report the collection account to the credit reporting agencies. A collection account appears as a separate account from the original debt on your credit report and can have a significant negative impact on your credit score. Collection accounts remain on your credit report for up to seven years from the date the original account first became delinquent.

Paying off your collection account will end the debt collector's actions, but it can take a couple months to see a change in the account status reflected on your credit report. Paying the account will not remove it from your credit report, but it can have other benefits:

• Newer credit scoring models ignore collection accounts with a zero balance, so your credit score could increase once you pay off the account.
• Potential lenders prefer to see a paid-off collection account when they check your credit report as part of a credit application; mortgage lenders often require it. Paying a collection account in full indicates to creditors you took financial responsibility for your debt.
• You'll no longer be harassed by the debt collection company.

Generally, the more recent the collection account, the more it will hurt your credit score. If the collection is the only negative item on your credit report, paying it off could help to improve your credit score.

Learn more: How to Pay Off Debt in Collections

How to Deal With Debt Collectors

Understanding your rights and taking these steps to deal with debt in collections can help you make a bad situation better:

1. Check your credit report. If you check your credit report and don't see the collection account listed, you might be able to pay the collection agency before the debt appears on your credit report.
2. Confirm you owe the debt. If a debt collector contacts you or sends a validation notice with the creditor's name and the amount owed, make sure the information is accurate. If you're unsure and want to dispute the debt, ask for verification in writing within 30 days. The collection process will stop until the debt collector can verify the debt.
3. Try to negotiate. If the delinquent debt is yours and you plan to make payments, see if you can repay the debt in monthly payments instead of one lump sum. You may be able to negotiate a lower payment amount, but when it comes to your credit, it's best to pay the debt in full.
4. Pay off the account. Collection accounts stay on your credit report for seven years, but some newer credit scoring models do not consider paid collection accounts in score calculations—so it's to your advantage to pay off the account as soon as possible.
5. Request an end to communication. If you send your debt collector a cease and desist letter asking them to end communication with you once the debt is paid, they must comply under certain circumstances. If you need help with what to say in the letter, contact an attorney. The CFPB also provides sample letters to get you started.
6. Consider legal action. If you feel the debt collector has violated your rights under the FDCPA, you may want to reach out to an attorney to discuss your options.
7. File a complaint. Both the Federal Trade Commission (FTC) and the CFPB can help you file a complaint against a debt collector if you feel your rights have been violated.

Frequently Asked Questions

The Bottom Line

Debt collection is never fun. But on the positive side, taking responsibility for your debt is the first step in getting back on track financially. While being proactive in paying your debts is essential, it's also important to regularly check your credit report to see what information is being added, updated or deleted to your report and what effect it's having on your score.