Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, firstname.lastname@example.org
Outstanding credit accounts often go to collection agencies when people fail to pay their creditors. One of the most stressful parts of being in debt is receiving phone calls and letters from collection agencies requesting immediate repayment of outstanding balances. It is typical for calls and letters to become more aggressive and threatening over time. The term “collection agency” describes a variety of business models that have one thing in common: recovering money on past due accounts or accounts that are considered in default. Collection agencies typically start contacting debtors after the original creditor (e.g., a department store) has made numerous unsuccessful attempts to collect the amount owed.
Some collection agencies, called first-party agencies, are subsidiaries of the company to which a debt that has recently become past due is owed. In other words, the collection agency is operating on behalf of the original creditor (e.g., a department store or credit card company). This is an important distinction because, with a first-party collection agency (note: individual debtors are considered the second party to a transaction), it is still possible to negotiate with the original creditor. This option is only available for about six months, however. Afterwards, creditors will usually write debts off their balance sheet and transfer them to a third-party collector where more aggressive collection tactics are commonplace.
First-party collectors (i.e., original creditors) are not subject to the Fair Debt Collection Practices Act (FDCPA), a federal law that places restrictions on certain collection practices by third-party collection agencies. Some operate with the same name and contact information as the original creditor while others use a different name and contact information. The latter is typically done in an effort to make the first-party collection agency appear to be an “outside” firm and, perhaps, be taken more seriously by debtors.
Most collection agency work, however, is performed by third-party collection agencies. These are firms that are not affiliated with the original creditor. Rather, they are independent companies that enter into an arrangement with the original creditor to recover money that is owed. In some cases, called “debt-buying,” the original creditor writes the debt off and sells it to a third-party collection agency at a substantially reduced price, often pennies on the dollar. In turn, the third party collector tries to collect the outstanding amount (or at least more than the amount paid to the original creditor). The difference between the amount paid for the debt and the amount collected determines a collection agency’s profit.
In a second business model, collection agencies work for creditors on a contingency fee basis and are paid a percentage of the amount that is successfully collected. According to industry figures, a typical debt recovery commission is 15% to 35% of the amount collected. The size of a debt and the length of time that it has been outstanding are often key variables. With this business model, original creditors have low up front costs to collect money owed to them because payment is made to a third-party collection agency only after successful debt recovery. A third method that collection agencies use to collect debts is to charge creditors a flat fee or hourly rate for collection services that typically include a series of increasingly aggressive letters and phone calls.
It should be noted that, with both contingency fees and debt-buying, third-party debt collectors are extremely motivated to act as aggressively as legally possible to maximize their profits. They are trained in a variety of methods to contact debtors and request money that is owed. In addition, some collection agencies use automated telephone messaging to contact debtors. The remainder of this fact sheet will discuss how to handle interactions with collection agencies and debtors’ rights under the Fair Debt Collection Practices Act (FDCPA), a federal law administered by the Federal Trade Commission (FTC). The FDCPA prohibits debt collectors from using abusive, unfair, or deceptive practices and defines what they can and cannot do when contacting people who are behind in paying personal and household debts.
The first thing to know about dealing with collection agencies is that everything is negotiable. Try to find out a collection agency’s “bottom line.” In other words, the amount that they will accept to consider a debt “paid in full.” According to the FTC, offering an amount equal to 60% to 70% of the balance owed is not unreasonable. Some debtors start out by requesting less to allow room for negotiation. Settling a debt in this manner can help avoid legal action by a debt collector. Of course, this strategy assumes that money from some source (e.g., tax refund) is available to make a large payment. This is often not the case. If available funds are limited, experts recommend sending a very positively worded letter by certified mail, with a return signature receipt, that proposes an affordable payment agreement.
Include the following in the letter:
¨An introductory paragraph that acknowledges the debt that is owed, briefly explains that you are unable to pay it at the current time and why, and proposes a workable payment schedule. Example: “According to my records and your [letter/phone call], the balance of my debt is $___. I am not disputing this amount. However, my current financial situation does not allow me to pay the amount that you are demanding. I am currently [unemployed, disabled, in the process of a divorce, etc.]. I can, however, make monthly payments of [$ amount; e.g., $50] on the [date; e.g., 15th] of every month.”
¨A second paragraph that requests written confirmation of the collection agency’s acceptance of the proposed repayment schedule. An accompanying check for partial payment of the outstanding debt would be referenced in the letter as follows: “If I do not hear from you, I will consider your cashing my check as confirmation that you accept my payment terms. If you do not accept my terms, I expect the enclosed payment to be returned to me immediately in the enclosed self-addressed, stamped envelope.”
¨A third paragraph that references the amount of the check- “As a show of good faith, I’ve enclosed [$ amount; e.g., $50]” - and concludes by stating “If my financial situation improves enough for me to increase my payment amount, I will contact you immediately. Thank you for understanding.”
According to the FDCPA, which regulates what debt collectors can and cannot do, collection agencies can:
¨Call a debtor’s place of employment unless they are told not to
¨Call a debtor’s friends and relatives to determine the debtor’s whereabouts (i.e., address, home telephone number, and name of employer), but not to tell others that the debtor is behind on repaying debts
¨Make settlement offers and/or payment arrangements
¨Take legal action in civil or small claims court (depending on the amount owed) to collect a debt; if the court issues a judgment, assets may be seized and wage garnishment may be required where part of a debtor’s wages are withheld
¨Leave messages on answering machines and voice mail (but they are prohibited from discussing the reason)
The following are things that debt collectors cannot do under the FDCPA:
¨Use profane language, threats, and intimidation (e.g., threats of a jail sentence, threats to seize property without a legal right to do so, threats to take away government benefits, and threats of a lawsuit unless they intend to initiate filing)
¨Threaten violence or criminal proceedings
¨Misrepresent themselves (e.g., using false names and/or false statements such as implying that they are attorneys or representatives of a credit bureau or state or federal government)
¨Send mail that looks like court or government documents
¨Contact a debtor before 8 am and after 9 pm on Monday to Saturday and before 1 pm and after 5 pm on Sunday; no calls are allowed on statutory holidays (e.g., Christmas)
¨Contact a debtor at work if the debtor’s employer disapproves or try to have a debtor fired
¨Use postcards or envelopes that indicate that the letter inside is about debt collection
¨Make debtors accept collect phone calls or pay for telegrams
Below are experts’ recommendations for interacting with collection agencies:
¨Identify the Caller- Request his or her name and the name of the collection agency
¨Remain Calm- A positive attitude accomplishes more than anger and can throw debt collectors off their game
¨Get Information in Writing- Request an itemized account statement if you believe the amount of the requested debt payment is wrong and dispute incorrect information in writing
¨Keep Copies- This includes copies of all correspondence from debt collectors and written summaries of the time, date, frequency, and content of phone calls
¨Respond to All Court Documents- A default judgment is usually granted against debtors who do not respond to lawsuits; i.e., the court will legally empower the collection agency to take action to obtain payment
¨Contact a Lawyer or Legal Aid Office- Do this, especially, if a collection agency is demanding payment of attorney’s fees and other costs above and beyond the original debt
¨Put All Requests in Writing- Write a simple two-sentence letter: “This letter is to notify you that I do not wish you to call, write, or visit me at home or work about the money that you claim I owe. Any further contact from you about this matter will be deemed to constitute harassment and abusive contact.” Afterwards, debtors should not have any further contact from a collection agency except notification that specific legal action may be taken or that the collection agency is not pursuing the debt any longer
¨Report FDCPA Violations- Credit experts advise contacting the Federal Trade Commission at www.ftc.gov and/or your state Attorney General’s office (www.naag.org) for information about your legal rights.