What are collection agencies?
Collection agencies are businesses that pursue payments on behalf of others for debts owed by individuals or businesses. Most of these agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.
There are many types of collection agencies; beginning with first-party agencies who are often times subsidiaries of the original company the debt is owed. Third-party agencies are separate companies contracted by a company to then collect the debts on their behalf for a fee in which the agency purchases the debt at a fraction of its initial value then collects upon it. For example, if you originally owed JP Morgan Chase $1,000, a collection agency may purchase that debt for only $150.
How do Collection Agencies profit?
Collection Agencies earn their profits in one of two different methods. Depending on the company, age of debt and amount of debt there are various factors that determine how a debt is purchased or contracted out. Some agencies will simply collect a percentage based on the amount of the debt.
The other method that some agencies use is to purchase the debt outright from a company that has totally written it off as bad debt and not believed to be collect-able. In this situation, collection agencies purchase the debt for a percentage and any amount over that percentage paid is considered gross profit. For example, if you originally owed a creditor $1,000, a collection agency might purchase that debt for only $150.
The most common method is through contract where a percentage of what they obtain from the debtor is collected without having to purchase the old debt. A good average for this would be around ten percent of the amount of the debt going to the collection agency. Continuing the example above, if you were to get that debt settled for $400, the collection agency would profit $250. That is how it benefits the collection agency even though you are not paying the debt back in full.
Consumer Rights Regarding Collection Agencies
If you are being hounded by debt collection agencies, it is vital to learn what your consumer rights are. The Fair Debt Collection Practices Act (FDCPA) of 1977 outlines what is and is not permissible behavior for debt collectors and agencies. Some agencies choose to ignore the limitations set forth by the FDCPA, and you have the right to seek legal action against them.
The FDCPA prohibits collection agency harassment. Harassment includes but is not limited to: calling you repeatedly, calling at any time other than between the hours of 8 a.m. and 9 p.m. in your time zone, threatening you or your assets, and calling anyone other than you about your debt. Debt collectors cannot call you at work, as long as you have mentioned to them that your employer prohibits such calls. You can send a collection agency a letter (cease and desist letter) requesting that they not contact you via telephone, and they must comply.
If collection agencies are contacting you, you are entitled to request a validation of the debt no matter what the debt is. If a collection agency cannot provide paperwork proving that the debt was in fact yours, that they are authorized to collect the debt, and that they are licensed to collect in your state, they must stop all collection activity and remove their trade line from your credit report. The FDCPA gives them 30 days to investigate the debt during the validation period. They cannot continue collection activity while investigating. A printout of what you owe is not a validation. Make sure to send all correspondence with collection agencies via certified mail in order to create a paper trail.
Statute of Limitations
Every state has a statute of limitations that defines the length of time a debt is legally enforceable. A debt beyond the time limit is known as a “time-barred debt.” Collection agencies cannot legally sue you for a time-barred debt. But that does not mean that they will not sue you. Check to see if your debt is too old to be enforceable because this will help you in court should the collection agency file a lawsuit. In the event that you are sued over a time-barred debt, you must show up in court. A judge has no way of knowing a debt is beyond the statute of limitations and not enforceable unless you show up to prove it.
Monitor your credit report regularly. According to the Fair Credit Reporting Act, a debt can only remain on your credit report for a maximum of 7.5 years, or 7 years from the date the original creditor charged off the debt. This date is known as the “date of last activity.” After that time has expired, the debt may not be reinserted onto your credit report. A collection agency is prohibited from changing the date of last activity on a debt in order to attempt to make the debt remain on your credit report for longer than the standard reporting period. Monitor your credit reports regularly to make sure that you do not have any re-aged or reinserted debts.
You can dispute any debt you find on your credit report with the credit reporting agency that is currently reporting it. The best way to file disputes is via certified mail in order to adequately submit documentation that will support your case to have the debt removed. If you requested a debt validation and did not receive one, this is grounds to request removal of a trade line. The FCRA prohibits credit reporting agencies from reporting debt that has not been validated.