What to Know About Debt Sold to Collection Agencies

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Maybe you’ve recently faced a serious financial hurdle and missed making payments against a credit card balance. Or maybe you’re a few months behind on your utility bills. At first, you’ll find yourself answering phone calls from your creditors trying to get you to pay. Eventually — it might take three months or up to six — the phone goes quiet, and you think they’ve given up.

Unfortunately, it’s more likely that the debt has been sold to a collection agency, and you can be assured that they’ll try their best to collect. The creditor may have given up, but the collection agency won’t; that’s how debt collectors make their money.

In addition to being a tremendous hassle, being pursued by a collection agency will likely have a negative impact on your credit reports. Read on to learn how debts are sold to third parties, what to do when a collection agency is trying to get you to pay and how to resolve the issue.

Where delinquent debt goes: third-party collection agencies

When you can’t pay your debt, most creditors follow a similar process to increase their chances of persuading you to pay. One of the tools at their disposal is selling your debt to a third-party collection agency.

When a debt has been purchased in full by a collection agency, the new account owner (the collector) will usually notify the debtor by phone or in writing. Selling or transferring debt from one creditor or collector to another can happen without your permission. However, it typically doesn’t happen without your knowledge.

By law, a consumer must receive written notice (known as a debt validation letter) within five days of the collector’s initial attempt to contact you. That notice must include the amount of the debt, the original creditor to whom the debt is owed and a statement of your right to dispute the debt.

If you receive a debt validation letter, you may want to contact a not-for-profit consumer protection organization that can help you navigate the collections process, as it can get complicated and lengthy. For example, if a collector is unable to make satisfactory arrangements with a consumer after a few months, the individual debt may be bundled with many others and sold to another collection agency. That process can be repeated many times over, even beyond the applicable statute of limitations for the consumer’s debt.

What to do when you can’t pay back a debt

You should do everything within your power to avoid letting a debt go unpaid. Otherwise you’ll risk significant damage to your credit scores and a major blemish on your credit reports for years to come.

However, if you’re facing a financial challenge, such as extreme medical debt or an abrupt loss of income, and find that you can’t pay the debt, that doesn’t automatically mean the collection agency has a right to take everything you own. In the worst-case scenario, the agency will try to garnish your wages or seize your property. These extreme actions are only possible, however, if the contract you signed with the original creditor and state law allow for them.

The federal Fair Debt Collection Practices Act regulates the means and tactics that debt collectors may use to entice consumers to pay. It’s important to know what kind of conduct is allowed, so you can report — and avoid — debt collectors who violate the law.

For example, collection agencies cannot misrepresent themselves, the amount you owe or the actions they plan to take to get you to pay. There are limitations to the collector’s ability to seek remediation through the courts, as well as how they may add collection fees.

Still, it’s not uncommon for collection agencies to threaten debtors with lawsuits — sometimes illegally — in order to scare them into paying. If, for example, the debt is old and the statute of limitations in your state has passed, then a creditor or debt collector may not be able to take you to court. In this case, because they can’t actually sue you, the threat of a lawsuit is itself illegal.

Debt collectors can't generally harass you, contact you at work or continuously call you in the early morning or late evening. If a collector is calling at work, the Federal Trade Commission recommends alerting the agency, either verbally or in writing, that you are not allowed to receive calls there.

The best thing to do if you are ultimately unable to pay your debt is to seek legal help. If you have multiple accounts in collections and the totals are well beyond your ability to create a realistic payment arrangement, you should consult with a bankruptcy attorney to discuss your options.

You should also know that even if you pay the debt in full, the collection may still show up on your credit reports until you contact the creditor and ask them to remove it.

The thought of receiving collection calls can be extremely nerve-wracking, but with a basic understanding of your rights, your options for resolution and the ways you can go about getting help, you’ll be better prepared to meet the challenge.

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