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Debt collectors aren’t big mean guys who break customers’ kneecaps when they can’t pay. Nevertheless, when you’re in a financial crunch, dealing with debt collectors can be annoying or even frightening. It doesn’t necessarily have to be that way.
Most collectors are professionals and conduct their business in a semireasonable (though often high-pressure) manner. There are some, though, that may use intimidation or illegal tactics to coerce consumers into paying past-due bills. The Federal Trade Commission reports that complaints about debt-collection companies are one of the top three categories by number of complaints.
Knowing your rights and what to expect from debt collectors can give you the confidence to protect yourself from illegal harassment, and to work out an arrangement that is satisfactory to everyone involved.
What Can You Expect from Debt Collectors?
If your credit card payment hasn’t been received by your card issuer ten days after the due date, your credit card issuer will probably send you a friendly note reminding you that your payment is past due. If you fail to make two payments in a row, you will usually get a more serious-sounding letter requesting immediate payment of the past due amount, and the creditor may follow that up with a phone call asking you where your payment is.
If you are sixty days or more delinquent, you may find your card frozen and your account closed. Many banks are willing at this stage, however, to reopen the account if you can get back on track. Other factors that may cause a bank to close your credit line: your income goes down, or your debts go up.
Once your account becomes ninety days or more delinquent, some creditors will start ”writing off” the account as a bad debt. That means that they’ve decided that they can’t collect through normal channels, and consider your account a “bad debt.” If your account has not been written off after ninety days, you’ll face more communications from the creditor’s collection department. If you still don’t pay, the creditor will probably write the account off when it becomes 120 to 180 days delinquent.
After an account has been written off (also called “charged off” or a “profit and loss”), most lenders will turn it over to a collection agency. In general, the smaller the bank, the quicker they will charge off accounts (since smaller issuers are less likely to have sophisticated internal collection agencies).
If the creditor’s collection department cannot collect the debt from you, it will next be turned over to an outside collection agency. A collection agency is a company in the business of collecting debts. Many collection agencies work on commission: They usually collect between a third and two-thirds of the amount they bring in for the creditor. Alternatively, some collectors or investors will “buy” bad debts for somewhere around 50 percent of the face value and try to collect for themselves.
Delinquent accounts are usually first turned over to “primary” debt collectors. These collectors try to bring in easier loans—ones that are only a few months behind. If they are successful, they receive about one-third of what they collect. If a primary collector can’t get you to pay within six months or so, the loan is usually turned over to a “secondary” collector. The secondary collector tries for another six months or so to collect. If successful, the debt collector will receive a commission of up to 45 percent. If the secondary collector can’t secure payment, the debt may be turned over to a third collector—the “tertiary” collector, who will earn a commission in the 50 to 55 percent range.
Credit card accounts are considered tough by many collectors, because in most cases the bank’s internal collectors have already tried—and failed—to collect. For that reason, some agencies start legal proceedings very quickly on delinquent credit card accounts. Others hire lawyers to send letters threatening legal action: If you don’t pay, they say, they’ll turn your account over to a lawyer for legal proceedings.
Remember, paying the creditor before the account is sent to collections is beneficial both to you and to the creditor to which you owe the money. The creditor saves the collection fee and you avoid a collection account listed on your credit record. Although not frequently the case, creditors’ internal collection agents may also earn commissions on the debts they collect. If that is the case, it is in the collector’s personal interest that you pay. Make it clear to the collector that you understand how this process works, and that you are amenable to working with them.
Once your account has been turned over to a collection agency, you usually can no longer negotiate with the original lender. If you call them to discuss the debt, they’ll just refer you to the collection agency.
Skipping town or trying to hide is not a particularly effective way to try to get out of paying a debt. It’s hard to get lost these days! Most debt collectors rely on advanced skip-tracing techniques to find people—and they can find most people sooner or later.
Don’t assume a debt has been “forgiven” if you don’t hear from a creditor or collector for a while. Collections may start three, four, or five years after a debt was charged off by the bank, if it has been passed on to several collectors, or if your financial situation has improved and a collector discovers you may be able to pay.
It usually takes debt collectors about thirty days to “close a case.” During that time, a collector may contact you almost a half dozen times.