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What everyone should know about debt collection

A road map for the process.
Written byAllie Grace Garnett
Allie Grace Garnett
Allie Grace Garnett is a content marketing professional with a lifelong passion for the written word. She is a Harvard Business School graduate with a professional background in investment finance and engineering. 
Fact-checked byDoug Ashburn
Doug Ashburn
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Updated:
Table of Contents
Pile of envelopes with overdue utility bills on a desk.
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What your creditors will do when things are (way) overdue.
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If you’re wondering about debt collection and how it works, then you may have gotten yourself into a financial pickle. Life happens—and sometimes your debt obligations exceed your repayment capacity. Understanding the nuances of debt collection is important for every borrower, even if you always pay on time.

And if you find yourself facing debt collection? Going through the process can be stressful, but it may enable you to achieve resolution with a creditor (or group of creditors) and regain control over your finances. Keep reading to learn how debt collection works so you can navigate the process with confidence.

Key Points

  • Debt collection is how creditors attempt to recoup money that’s owed them.
  • A debt must become delinquent before the debt collection process starts.
  • Creditors and debtors each have rights during the debt collection process.

What is debt collection?

Debt collection is the process by which lenders or third-party debt collection agencies pursue repayment of money owed by individuals or businesses. Debt collection typically starts after a borrower has missed enough payments to formally default on a credit card balance or loan.

Debt collection is the primary mechanism by which creditors attempt to collect monies owed. The ability of creditors to initiate the debt collection process, which is highly regulated by the Consumer Financial Protection Bureau (CFPB) and the Fair Debt Collection Practices Act (FDCPA), provides some degree of protection for your financial interests.

Several types of debt may be subject to debt collection:

Collecting outstanding debts can be time-consuming and arduous for a lender, which is why they may choose to employ third-party debt collectors. Debt and the responsibility for its collection is frequently sold by lenders to one or more debt collection agencies.

Creditors that collect their own debts are typically banks, federal or private lenders, credit card companies, utility providers, or medical establishments. Third-party debt collectors are usually independent agencies, which may specialize in recouping specific types of delinquent debt.

Learn about good debt and bad debt.
Encyclopædia Britannica, Inc.

Although creditors have certain legal rights to pursue debt repayment, debtors are afforded important protections, too. The Fair Debt Collection Practices Act is the key legislation that prohibits harassment and provides guidelines for fair debt collection practices.

How does debt collection work?

Maybe you’re facing the prospect of undergoing the debt collection process—or perhaps it’s already begun, and you’re feeling lost and panicked. Either way, you can benefit from learning about how this process generally works.

1. Your debt becomes delinquent

Missing a credit card payment, having an overdue medical bill, or failing to pay another type of debt can cause the debt to become delinquent.

Being delinquent or otherwise defaulting on a debt doesn’t happen overnight—you’re afforded a defined grace period to make the required payment. (You may incur financial penalties during this grace period, even if you avoid default.) The type of debt typically determines the amount of time that must elapse before the debt is deemed delinquent. Private debts generally have the shortest grace periods—as little as 90 days—while federal debts may not become delinquent for as long as nine months.

2. The debt collector makes initial contact

You may get a phone call from a number that you don’t recognize, or a stern email might land in your inbox. You may also receive a physical letter in the mail. After a debt becomes delinquent, the debt collector’s first move is typically to attempt to make contact.

What does the debt collector aim to communicate? At this stage in the debt collection process, you’re provided with, at minimum, all of the legally required information:

  • Your name and mailing address specifying you as the debtor
  • Name of the creditor (or creditors) attempting to collect the debt
  • Name of the original creditor, if different from the entity collecting the debt
  • Any account numbers associated with the debt
  • Statement that the notice you’re reading is from a debt collector
  • Current amount of the debt, including any interest, fees, penalties, or credits
  • Your rights during the debt collection process
  • The debt collector’s contact information

Note: Before you engage with a debt collection notice, make sure it’s legit. Scammers and fraudsters often use scare tactics, such as impending debt collection, as a way to gain access to your money and/or personal information. If a purported debt collector asks you for any of the above information, it could be a red flag.

3. Communication and negotiation with the debt collector

A debt collector may relentlessly call, email, or send letters until you’re ready to communicate. During the next phase of the debt collection process, you typically have several options. You can start by requiring the debt collector to verify the debt, including the accuracy of the amount owed and that it belongs to you. You may also dispute the debt if any of the information that you’re provided is invalid.

When debt collection fails: Filing for bankruptcy

Most of the time, financial burdens are manageable—especially if you catch them early. But sometimes, bankruptcy may be your only ticket out of rock-bottom territory. Learn more about Chapter 7 and Chapter 13 bankruptcy.

If you’re ready to cooperate to resolve the debt, then you may have an opportunity to negotiate with the debt collector. Negotiations can produce many different outcomes, including:

  • Paying less than the amount owed as a settlement offer
  • Paying via a lump sum or a payment plan
  • Removal of any negative information from your credit report

Throughout the negotiation process, be sure to carefully document your interactions with the debt collector. Save all your written communications and record the details of every phone conversation. If you’re unable to reach an agreement, this documentation may be crucial for resolving disputes.

4. The debt collector takes legal action

This is the step of the debt collection process that you’ll want to make every effort to avoid—facing legal action from a debt collector. Creditors who are unable to collect a debt may resort to obtaining a judgment in a court of law.

What can happen if a judgment is obtained in the creditor’s favor? Nothing good:

5. Resolution of the debt collection process

The debt collection process is complete when the debt is satisfactorily repaid or otherwise settled with the creditor or debt collection agency. You’ll want to save your receipts to prove repayment in the event of a later discrepancy or dispute about the debt.

You can also request a letter of satisfaction or release from the debt collector. A document of this type confirms that the debt obligation has been fully satisfied and there is no further repayment obligation for you. You may also request a written statement confirming that the debt collector will notify all relevant credit bureaus of the debt’s resolution.

This when you can finally feel relieved that the debt collection process is finished. Follow up a few months later by checking your credit report to ensure that the bad debt has been updated or removed.

How to learn more about debt collection

You may have many more questions about debt collection and how to avoid the most common pitfalls. If you want to learn more, these are your best options:

You may also access consumer assistance resources, available locally or online. There are nonprofit organizations, legal aid clinics, and consumer advocacy groups that provide educational materials and free or low-cost debt resolution assistance.

The bottom line

Debt collection is never fun, and the arduous nature of the process may be exacerbated by debt collectors who use aggressive or unethical methods. Your best move is to engage with the process from start to finish in a serious and conscientious manner, working in cooperation with the debt collector to achieve an outcome that satisfies all parties.