What is debt collection and how does it work?

If you have outstanding debt, you may have debt collectors contacting you

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Carrying a certain amount of credit card debt or auto debt may not be the end of the world, particularly if you're able to pay it off in a reasonable amount of time. But what happens when your debts become unmanageable and you simply cannot pay them off? Not making payments on your debt can damage your credit score, and your debts may ultimately get sent to a debt collector.

Having debt in collections can be incredibly stressful, but this scenario is actually quite common. A recent report from the Urban Institute revealed that 1 in 5 adults ages 18 to 24 have debt in collections, and young people are particularly vulnerable when it comes to delinquencies on credit card bills, retail loans and auto loans.

If you have debt in collections or worry that's the direction you're headed, you should find out what debt collection means, what debt collectors are legally allowed (and not allowed) to do and steps you can take to improve the situation.

Key insights

  • Debt collection is a process that takes place when you fail to pay back a debt you owe, such as credit card debt or an auto loan.
  • Some creditors have their own debt collectors, but it's possible your debt could get sold to a third-party debt collector or agency.
  • The Fair Debt Collection Practices Act (FDCPA) protects consumers against certain debt collection practices, including harassment and threats.

What is debt collection?

Attorney Steven T. Mandelaris of Mandelaris Law in Denver says debt collection is "the process of pursuing payment of a debt that is owed by an individual or entity," and it comes into play when an individual or business fails to make the agreed-upon payments on a loan or credit account.

Debt collection is typically facilitated by third-party debt collection agencies after your creditor decides to give up on collecting the debt. This means your unpaid debt is no longer with the credit card or loan company that extended the credit; it now belongs to the debt collection agency or another third-party company.

Fortunately, your bills don't move onto debt collection agency desks overnight. Equifax says you'll receive several communications from your creditor when your bill is 30, 60 and up to 90 days late. Eventually, these communications will stop, and it's easy to think the debt has simply disappeared. However, the most likely scenario is the creditor sold the debt to a collection agency that will begin pursuing you for repayment.

There are other consequences when you make late payments, as well. For example, paying a bill late can cause considerable damage to your credit score, since payment history is a major factor when it comes to determining credit. You may also be charged a late payment fee, or even a penalty annual percentage rate (APR) on credit card debt.

What do debt collectors do?

Debt collectors typically begin contact once you are sufficiently past due on a debt, but they might also contact you to try to reach someone you know with an unpaid debt. In nearly every scenario, debt collectors reach out because a third party has bought the debt and it is trying to get all or part of the money back.

Mandelaris, the lawyer in Denver, says the first step in the debt collection process is usually a demand letter or phone call from the original creditor or a collection agency hired by the creditor. The main goal of debt collectors is getting you to pay up so they can recoup the money they paid for your debt and (possibly) turn a profit. They can do this by contacting you in every possible manner, including in person, through the mail and over the phone.

Debt collectors are known for being relentless in their pursuit of unpaid debts, and you may find they won't stop calling and bugging you if you don't take action.

Know your rights: debt collection regulation

Fortunately, the FDCPA sets limits on what debt collectors can legally do to collect on their debts. For example, debt collectors cannot call you at work if you tell them you cannot receive calls there.

However, debt collectors are legally allowed to call you any day of the week (including Sundays) or send letters, emails or text messages to collect a debt if they have your number and you haven't requested they stop.

Debt collectors can even come to your house, but they cannot contact you before 8 a.m. or after 9 p.m. unless you agree to it.

Another detail to know about the FDCPA is that it covers personal debts but not business debts. The FDCPA covers the following types of debts:

  • Mortgages
  • Credit cards
  • Medical debts
  • Other debts mainly for personal, family or household purposes

The FDCPA states that debt collectors cannot harass you. This means they cannot:

  • Use obscene language when communicating with you
  • Threaten to harm you
  • Repeatedly call you over the phone

Debt collectors also cannot lie, meaning they are legally prohibited from:

  • Saying you owe a different amount than you actually do
  • Pretending to be someone they're not, such as an attorney or government official
  • Making threats regarding the consequences of your unpaid debts, like saying you'll go to jail

Debt collectors cannot treat you unfairly, meaning they cannot:

  • Try to collect more than the debt you owe unless your original contract says they can
  • Deposit a post-dated check you sent earlier than specified
  • Publicly share your debts with anyone, including in written communications

The FDCPA also requires debt collectors to supply you with specific types of information about your debt. This includes:

  • The name of the creditor
  • The amount you owe
  • The fact that you can dispute the debt
  • The fact that you can request the name and address of the original creditor, if different from the current creditor

If a debt collector does not mention this information during their first communication with you, they are required to send this information in writing within five days of their initial contact.

The FDCPA also grants you the right to ask debt collectors, in writing, to stop contacting you. Once you send the debt collection agency a letter requesting no contact, the debt collector is no longer allowed to contact you, other than to say they are going to cease contact or if they are taking you to court.

Debt collectors are also legally prohibited from contacting you if they are aware you have legal representation. In this scenario, the debt collector must contact your attorney about the debt instead.

What to do if your debt is in collections

Telling a debt collector in writing they can no longer contact you may stop the calls, but this doesn't mean debt collectors cannot pursue the debt any longer. In fact, the Consumer Financial Protection Bureau notes that debt collectors can sue you for the amounts you owe, and they will almost certainly report your unpaid debts to the credit bureaus.

Mandelaris, of the Denver law firm, says a range of consequences can come about in the event of a lawsuit, and many of them are unpleasant.

"If a court rules in favor of the creditor, the court may issue a judgment for the debt and order the debtor to pay the debt in full or through wage garnishment or seizure of assets," he said.

Also be aware that debt in collections and other negative items can stay on your credit report for up to seven years, which can cause considerable damage to your credit score. That's why your best bet is dealing with debt in collections early on — long before any legal consequences come into play.

If you have debt in collections already, taking the following actions can help you remedy the situation:

1. Verify the debt

Mandelaris says the first step you should take is asking the debt collector for written proof of the debt, including the amount and the original creditor. This step is important, since errors happen, and you shouldn't spend time or energy trying to settle or pay back debts you don't actually owe.

2. Dispute debts you don't recognize

The Federal Trade Commission says you can and should dispute debts you think may not be yours. You can do this by sending the debt collector a letter saying you don't recognize all or part of the charges within 30 days of verifying the debt.

From there, the debt collector must stop trying to collect on the debt until they mail you proof of what you owe, such as a copy of an original bill that details this information.

3. Negotiate repayment

"If the debt is valid, try to negotiate a payment plan that you can afford," said Mandelaris. This step can help you begin paying back amounts you owe, with the goal of paying off debt in collections for good.

You can also consider trying to settle the debt for less than the full amount if the collector is willing. In this scenario, you would ask the debt collector if it will accept a cash payment of a certain amount in order to have the debt considered paid in full.

4. Get everything in writing 

Mandelaris says that when you're negotiating with debt collectors, you need to get any agreement or arrangement with the collector in writing, including the payment amount and due date.

"Keep records of all communication and payments made to the collector," he said.

5. Know your rights

Knowing your legal rights, including the rights we outlined in this guide, can also help protect you from unfair practices.

Mandelaris adds that if a debt collector is violating the FDCPA or other laws, you have the right to seek the help of an attorney or consumer protection agency.

Could your debt be reduced or forgiven? Take our financial relief quiz.


    Can you go to jail for debt?

    Failing to pay some types of debts, including child support payments or federal taxes, could ultimately result in jail time in certain situations. However, the majority of unpaid debts never lead to jail, and the worst consequences are limited to being sued by a creditor or debt collector in civil court.

    Do debt collections affect your credit?

    Debt in collections can have a significantly negative impact on your credit score. The negative reporting can stay on your credit report for seven years.

    What happens if you don’t pay debt collectors?

    If you don't pay debt collectors, they can ultimately sue you in civil court. If a court rules in favor of the creditor or debt collector, it may issue a judgment for the debt and order you to pay the debt in full. If you still don't pay, you could wind up being subject to wage garnishment or seizure of assets.

    What is considered harassment by a debt collector?

    There are many situations that may be considered harassment based on protections built into the FDCPA. Examples include repetitive phone calls, debt collectors using obscene language, threats of violence or harm, or publishing your name on a list of people who don’t pay debts.

    Bottom line

    Dealing with debt collectors can make life harder than it needs to be, so it's always best to avoid this situation if you can. Make at least the minimum payment toward every debt you owe each month, and stay on top of your regular expenses and bills. If the number of bills you're paying stresses you out or your interest rates are too high, you can consider options like debt consolidation.

    Once your debts are sold to a collection agency, you'll want to resolve the situation as quickly as possible. Debt collectors may call you or send you mail incessantly, and they can even take you to court.

    While the FDCPA protects you from certain behaviors debt collectors are known for, including harassment and unfair practices, remember that your debts won't go away on their own.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Urban Institute, " What Can Policymakers Do to Help Young Adults Cope with Debt? " Accessed Feb. 8, 2023.
    2. Equifax, " What Happens If I Default on a Loan or Credit Card Debt? " Accessed Feb. 8, 2023.
    3. onsumer Financial Protection Bureau, " What is a debt collector and why are they contacting me? " Accessed Feb. 9, 2023.
    4. Federal Trade Commission, " Debt Collection FAQs ." Accessed Feb. 9, 2023.
    5. Consumer Financial Protection Bureau, " Are there laws that limit what debt collectors can say or do? " Accessed Feb. 9, 2023.
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