Debt Management

What to Know When Your Creditor Sells Your Debt to a Collection Agency

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In this article


  • Debt is money that you owe to an individual, a financial institution or a business. If you fall significantly behind on your payments, your creditor may sell your debt to a collection agency.
  • Your creditors can transfer and sell your debt to a collection agency without your permission. However, the collection agency must contact you about the sale before attempting to collect the debt.
  • Collection agencies use many tactics to collect a debt, including persistent phone calls, letters and even threats of legal action against you.

If you've fallen behind on your monthly credit card payments or failed to pay a medical bill on time, you may know the challenges of dealing with a collection agency. How does your debt fall into the hands of a debt collector and what can you do about it? Learn more about why creditors may sell debt to collection agencies — and what you can do to pay it off.

What is debt?

Debt is money that you owe to an individual, a financial institution or a business. Carrying debt is not always a bad thing. For example, you may take out a loan to pay for an expensive purchase, such as a car, a home or college tuition. In these cases, you borrow the money from a bank or other type of lender and then repay your debt based on your loan agreement.

But what happens when you can't pay back what you owe? Delinquent debt can accumulate penalties and fees and harm your credit scores. Plus, if your original creditor believes that you can't pay, they may engage a debt collector to help recover what you owe. In some cases, they may even sell the debt to the collection agency outright.

What is a debt collection agency?

Collection agencies are third-party organizations that recover unpaid debts for profit. In some cases, they're paid by your original creditor to help collect the money you owe. Or they may purchase your past-due account from your creditor before taking over collections. Either way, collection agencies generally have a single goal: to contact you about your delinquent debt and persuade you to pay what you owe.

What to know about debt sold to collection agencies

Your creditors can transfer and sell your debt to a collection agency without your permission. Creditors may choose to sell a debt — often for far less than it is worth — because they do not believe you will pay what you owe. Selling the debt can help them recoup at least some of their investment.

When a collection agency acquires your debt, you are typically notified by phone or in writing. According to the Fair Debt Collection Practices Act, the debt collector must send a written notice — called a debt validation letter — within five days of their first communication. Your letter will generally include details about your total debt and the creditor seeking payment, along with instructions regarding your right to dispute your debt.

If you and your debt collector can't reach a repayment agreement, your account may be sold to a different collection agency. This process can repeat many times, lasting far beyond the statute of limitations for debt collection in your state, or the limited time window in which debt collection typically occurs. If you don't pay, the collection agency may attempt to garnish your wages. They may even seize your property according to the terms of your loan or your credit account's contract.

A debt collector may also threaten you with a lawsuit to frighten you into making payments, even if they're legally barred from taking you to court. For instance, if the statute of limitations in your state has passed, a debt collector usually can't sue to collect the debt. These legal safeguards can help protect vulnerable debtors from falling victim to predatory collection practices.

How to pay off debt in collections

If your debt is sent to collections, the legal and financial consequences can be significant. If you don't pay what you owe, you risk damage to both your credit scores and your credit reports for up to seven years.

If you're contacted by a debt collector, first confirm that you do in fact owe the debt. Then, check that the statute of limitations has not passed. The length of time and terms of a debt's statute of limitations vary from state to state, so it's important to know your rights. Take care to also review your legal protections under the Fair Debt Collection Practices Act, a federal law that regulates how collection agencies can pursue unpaid debt.

Next, determine how much you can afford to repay your delinquent debt. Calculate both the money you can spare per month and what you're willing to pay all at once to settle the debt in full. Keep in mind that the debt collector may be willing to negotiate a reduced lump-sum payment or a lenient repayment plan over time.

Finally, contact the collection agency and present your proposal for repayment. Make sure to document each step of the process in writing, including the amount and frequency of your payments and how many payments are required to settle your debt. Once you reach an agreement with your collection agency to settle your debts, be sure to get the terms in writing.

When it comes to helping your credit scores bounce back from unpaid debt, patience is key. Although delinquent debt may stay on your credit reports for years, the impact on your credit scores will generally diminish over time. However, even if you pay the debt in full, the collection account will generally remain on your credit reports for up to seven years.

Above all, once your delinquent debt is behind you, it's critical to keep up with any loan, credit card or other debt payments moving forward to avoid further damaging your credit scores.

A collection agency's aggressive tactics can be overwhelming. But with a strong repayment plan and a thorough understanding of your rights, you'll be better prepared to face a debt collector head-on.

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