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How do Debt Collection Agencies Work?
by
JG Wentworth
•
October 16, 2024
•
7 min
Debt collection agencies play a significant role in the financial ecosystem, acting as intermediaries between creditors and debtors. Their primary function is to recover unpaid debts on behalf of various entities, including banks, credit card companies, healthcare providers, and other businesses.
In this article we’ll take an in-depth look at how debt collection agencies operate, their legal framework, and what consumers should know about their rights when dealing with these agencies.
Debt collection agencies (in a nutshell)
Debt collection agencies are companies that specialize in collecting unpaid debts. They typically work in one of two ways:
- First-party collectors: These agencies are hired by creditors to collect debts using the creditor’s name. They often step in early in the debt collection process.
- Third-party collectors: These are independent agencies that purchase debts from creditors for a fraction of the debt’s face value or work on commission to collect the debt.
The debt collection process
The following talking points summarize the basic, overall steps most agencies take when seeking unpaid debts.
1. Acquiring the Debt
- Debt purchase: Some agencies buy debts from creditors for a percentage of the face value. For example, they might pay $20 for a $100 debt, hoping to collect more than they paid.
- Commission-based collection: Other agencies work on behalf of creditors for a percentage of what they collect.
2. Locating the Debtor
Agencies use various methods to find debtors:
- Public records searches
- Credit reports
- Information from the original creditor
- Skip tracing techniques (using databases to find current contact information)
3. Contacting the Debtor
Once the debtor is located, the agency will attempt to make contact through:
- Phone calls
- Letters
- Emails
- Text messages (if permitted)
4. Negotiating Payment
Agencies will try to collect the full amount but are often willing to negotiate:
- Payment plans
- Settlements for less than the full amount
- Hardship programs
5. Reporting to Credit Bureaus
Many collection agencies report unpaid debts to credit bureaus, which can negatively impact the debtor’s credit score.
6. Legal Action
If other methods fail, some agencies may recommend that the creditor pursue legal action, such as a lawsuit or wage garnishment.
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Legal framework and regulations
Debt collection agencies must operate within a strict legal framework, primarily governed by the Fair Debt Collection Practices Act (FDCPA) in the United States. Similar laws exist in other countries.
Key provisions of the FDCPA include:
- Communication limits: Collectors can’t contact debtors at inconvenient times (generally before 8 am or after 9 pm).
- Harassment prohibition: Collectors can’t use threats, abusive language, or excessive phone calls.
- Truthfulness requirement: Collectors must be honest about who they are and the amount owed.
- Validation rights: Consumers have the right to request validation of the debt.
- Cease communication requests: Consumers can request in writing that the agency stop contacting them.
Other challenges faced by debt collection agencies
- Regulatory compliance: Staying compliant with ever-changing laws and regulations.
- Public perception: Overcoming negative stereotypes associated with debt collection.
- Locating debtors: Finding people who may not want to be found.
- Verifying debt information: Ensuring the accuracy of debt details, especially for older debts.
- Cybersecurity: Protecting sensitive financial and personal information.
The impact of debt collection on consumers
Debt collection can have significant effects on consumers:
- Financial stress: The pressure to repay debts can cause considerable anxiety.
- Credit score impact: Unpaid debts in collection can severely damage credit scores.
- Legal consequences: In some cases, consumers may face lawsuits or wage garnishment.
- Employment issues: Some employers check credit reports, potentially affecting job prospects.
The bottom line
Debt collection agencies serve a necessary function in the financial ecosystem, helping to recover unpaid debts and maintain the flow of credit. However, their practices have often been controversial, leading to strict regulations to protect consumers. As technology advances and societal attitudes towards debt evolve, the industry continues to change.
For consumers, understanding how these agencies operate, as well as knowing their rights and protections, is crucial. If you find yourself dealing with a debt collector, remember that you have rights, and there are often options for resolving the debt in a manageable way.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include: 
- One monthly program payment 
- We negotiate on your behalf 
- Average debt resolution in as little as 48-60 months 
- We only get paid when we settle your debt  
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side? 
About the author
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, NE, NM, NV, NY, NC, OK, PA, PR, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in any other state contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required. 
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment. 
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy. 
