How Do Debt Collection Agencies Work?

Can someone please let me know how debt collection agencies work? I am having trouble with old credit card debt that I believe is being handled all by third party debt collectors. These debt collectors seem very aggressive, is this normal?

Herbert- I want you to know that I had multiple experiences with debt collection agencies in the past and to answer one of your questions a lot of them can be very aggressive. Understanding why they are aggressive will give you some peace of mind as most of their scare tactics are not legitimate.

Typically, original creditors will try to collect on the debt for 5-6 months before assigning the debt to a third party debt collection agency. These collection agencies take on older debts that are past due because the debts are no longer valued assets on the books of the original creditors.

Debt collection agencies are typically compensated a percentage of whatever amount of money they collect on the debt. For example, if the debtor owes $10,000, and the collection agency settles the account with that person for $4,500, the collection agency may get 15% of the settlement amount, while the remaining portion that is collected is sent back to the original creditor. Since these third party agencies are compensated on the amount they collect, a lot of debt collectors employ very aggressive tactics to scare the debtor and force them to cough up as much money as they possibly can.

Keep in mind- third party debt collectors cannot sue you, despite the fact that this is one of the most common threats they make. Only an attorney licensed in the state where you reside could potentially file a lawsuit to collect on a credit card debt. I also know that there are companies, known as debt buyers, who collect debts for original creditors if they are unsuccessful. However, I do not know too much about these companies.

Just to add on to Frederickr's answer...so there are two types of collection agencies:  1) ones who are assigned accounts directly by lenders such as credit card companies.  These are the types of collection agencies Frederickr describes in his post above.  2) The other type are debt buyers.  How they work is they purchase your debt in a huge portfolio with thousands of other delinquent accounts for between 1 to 15 cents on the dollars (so if there's a $1 million dollars of debt owed in one of these portfolios, they only buy it for between $10,000 and $150,000).  Whatever they collect on those past due accounts is their profit.  Needless to say, even when they get 30% of the balance owed on an account, the debt buyer is happy because it made a nice profit. 

How much they buy accounts for depends on how long the accounts have been past due (the longer it's been delinquent, the less the portfolio costs).  So if you have a debt that's been sold a few times and been delinquent for over a year, you can settle it for very little.  Just to clarify, settling is where you offer a lump sum of money, which is less than the balance, to the collectors and they agree to consider the debt as satisfied or paid.

You may also want to consider using a debt settlement company for you if you don't want to deal with the collection agency yourself.  There's a form up top if you're interested in getting a free consultation about this option.            

Thank you both for some really helpful information. I was speaking with a debt settlement company yesterday evening, and they said they may be able to help me reduce my debts for a fee. They said that they charge me 15% of my total debt amount over a year and a half. Is this normal?

Herbertwblake- yes, 15% of the total debt amount as a fee is actually the industry average for debt settlement companies. If they spread it out over 18 months that is standard as well.

Make sure you understand the fee structure in depth- for instance, is there a retainer fee and a service fee? Or, are the any other monthly fees that weren't mentioned to you in that first conversation?

The last thing I would suggest doing is finding out of the company has a money back guarantee. I would shy away from companies who do not as you risk paying a non-refundable fee to a company who may not be doing the best work.

How do debt collection agencies work if my debt has charged off now?

They'll still be contacting you, Suzan. Either the debt will be reassigned to a third party debt collections agency or still with their in-house collections department. Bear in mind that debt collection agencies never report your status to the credit bureaus--it is the creditor's responsibility, not yours.

How do debt collection agencies work on charged off (from the original creditor) accounts? The collection agency would contact you a few days after to try to collect.

How do debt collection agencies work- with consumers who refuse to respond to their collection efforts?

How do debt collection agencies work- with consumers who refuse to respond to their collection efforts?

Assuming that the debt has been validated - and still the consumer was not able to respond (to the notices that the collection agency has been sending) - the agency would sue for a judgment.