If you’re wondering how to rebuild credit after collections, you might be interested in learning what a collections agency is.
A collections agency or a debt collection agency is a third party that collects unpaid or long-due loans from borrowers. A lender or a creditor may hire such an agency after they’ve made multiple attempts to recover the borrowed amount but failed.
In this post, we’ll share a detailed insight into how these agencies work, what happens if the borrower still refuses to pay, and much more.
Some Key Terms
Before we dive into the topic, it’s important to be familiar with the following terms:
- Lender/Creditor: This is someone who lends money or property as a loan, and can be an individual or a financial organization like a bank.
- Defaulter/Debtor: This is the person or organization who acquired the loan but failed to repay it on time.
How Does a Collections Agency Work?
Imagine you’re a private lender and you gave a loan of $10,000 to your ex-employee. Because it was a huge amount, you did all the paperwork, and both parties agreed on interest-free $2,000 installments every three months. This means they will return $2,000 of the borrowed amount after every three months.
Now, your ex-employee paid back $4,000 through the first two installments but went off-grid at the time of the third installment. You tried calling, e-mailing, and even writing to them, but couldn’t get in touch with them.
In this case, you’ll reach out to a collections agency. It will sign an agreement with you and ask for some data about the borrower. Once you have hired it, it will take the following steps to trace the borrower and retrieve your amount:
- It may consistently call the borrower to remind them of their dues and the possibility of strict legal action in case of non-payment.
- It will only call between 9:00 AM and 8:00 PM.
- It may mail multiple notices of late payment.
- It may reach out to the defaulter’s current employer.
- It may show up at the defaulter’s residence.
If you’re wondering how they will track the defaulter’s phone number, debt collectors have several ways of doing that. They’ll first refer to the information you provide them; after that, they’ll search for contact information in legal databases. Lastly, the agency will reach out to the defaulter’s family, friends, and colleagues to locate them.
Case A: Success
If the collection agency succeeds in recovering your amount or assets, you will have to pay a percentage of the recovered funds or assets to the agency. You’ll settle this percentage with the collection agency at the time of hiring it.
Case B: Failure
If the collection agency fails to recover the funds, you will still have to pay its service fee. But, of course, the percentage clause in the hiring agreement will be nullified.
As for the defaulter, they will become ineligible for acquiring any major loans for at least a span of seven years. The collection agency will add the collection status to their credit report, which puts their credit score at the lowest possible.
Limitations of a Collection Agency
The borrower owes you money and is apparently on the wrong side of the frame. Does that mean you or the collections agency can do anything to retrieve the due amount?
Yes and no–the government doesn’t have a lot of say on how the creditor’s in-house debt collection department deals with the debtor but collection agencies have to abide by the Fair Debt Collection Practices Act. According to this act, debt collectors cannot do the following:
- Sue the borrower for the dues
- Seize debtors’ assets without winning a lawsuit against them
- Pursue debt collection if the debtor has filed for bankruptcy
- Physically harm the debtor
- Harm or threaten to harm the debtor’s family or friends
- Call the debtor’s workplace if the debtor has clarified that the employer doesn’t approve of these calls
With that said, you should know that in-house debt collection departments are also restricted to the measures mentioned in the agreement that the debtor signed when they acquired the loan.
The in-house debt collection department cannot take a violent or aggressive approach towards debt collection (such as threatening to physically harm the debtor).
FAQs
How Long Does it Take for a Collections Agency to Recover the Money?
Usually, a collections agency takes three to six months to recover the dues. Beyond this, it adds the collection status to the debtor’s credit report
Is There a Way to Remove Collections From the Credit Report Without Paying?
Yes–debtors can remove collections from credit reports by sending a letter of goodwill (asking for forgiveness). Alternatively, the debtor can dispute the collection by writing a debt dispute letter.
For more information related to debt and collections, check out our posts on whether paying off collections improves your credit score and how to freeze your credit.