Definition
A collection agency is a business that specializes in collecting payments from consumers who default on a debt.
Analysis
Collection agencies contact consumers by mail, telephone or other means for the purpose of collecting on a debt. Collections can be an internal department of the original creditor, or they can be a third party company.
Typically, when a consumer first becomes delinquent on a debt, the account is referred to the creditor’s internal collections department. If the debt still cannot be collected on and goes into default, the creditor will charge the debt off as a bad debt and likely sell the debt to a third party collection agency.
Collection agencies are regulated by federal law, particularly by the Fair Debt Collections Practices Act. Collection agencies are prohibited from harrassing or abusing consumers, and are prohibited from contacting them during certain hours of the day. Still, it is not uncommon for collectors to break the law when attempting to collect a debt. It is important for consumers to know their rights according to the Fair Debt Collections Practices Act.
Collection agencies will typically purchase debt accounts from primary creditors for a fraction of the debt balance. They will pursue them for some time to attempt to collect the full amount, frequently with additional interest.
Collection agencies will frequently accept a settlement for less than the amount requested. This amount must be paid in a lump sum upfront. Payment plans with collection agencies tend to do little more than lengthen the period of time that a debt remains listed on a credit report.
If a collection agency gives up on a debt, it may sell it to another collection agency for a fraction of what it paid for the debt. This process can occur multiple times, and each collection agency may be listed on your credit report in addition to the original debt account that was defaulted on.
Some collection agencies specialize in buying older debts for pennies on the dollar and attempting to collect on them. In many cases, the statute of limitations may already be up on the debts. However, by purchasing the debts at such low prices, these collection agencies are able to remain profitable by collecting on just a small percentage of these debts. This is new generation of collection agencies known as zombie debt collectors that specialize in pursuing expired debt.
