How Collection Agencies Work

Getting a call from a collection agency can be stressful and even scary. But understanding how the collections process works — and knowing your rights — puts you in a much stronger position. Collection agencies have rules they must follow, and you have more power in the situation than you might think.

How Debt Ends Up in Collections

When you stop making payments on a debt, your original creditor (the credit card company, hospital, utility provider, etc.) will try to collect from you for a period of time — usually 90 to 180 days. During this time, they’ll send notices, call you, and report late payments to the credit bureaus.

If they can’t collect, one of two things happens:

• They hire a collection agency. The agency works on the creditor’s behalf and earns a commission (typically 25-50%) of whatever they collect from you. The original creditor still owns the debt.
• They sell the debt to a collection agency. The agency buys the debt for a fraction of what you owe — often 4 to 10 cents on the dollar — and then tries to collect the full amount from you. The agency now owns the debt.

When debt is sold, it sometimes gets resold again and again. That’s why you might get calls from companies you’ve never heard of about debts you don’t immediately recognize.

What Collection Agencies Can and Cannot Do

Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA), a federal law that limits how they can behave. Here’s what they can and cannot do:

They CAN:

• Contact you by phone, mail, email, or text
• Report the debt to credit bureaus
• Offer settlement arrangements
• Sue you for the debt (in most cases)

They CANNOT:

• Call you before 8 AM or after 9 PM in your time zone
• Contact you at work if you tell them your employer doesn’t allow it
• Use threatening, abusive, or obscene language
• Lie about the amount you owe or who they are
• Threaten legal action they don’t intend to take
• Contact you after you’ve sent a written request to stop
• Discuss your debt with anyone other than you, your spouse, or your attorney
• Add unauthorized fees or interest to the debt

If a collector violates the FDCPA, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) and may even be able to sue for damages.

Your Right to Debt Validation

One of your most important rights is debt validation. Within five days of first contacting you, a collector must send you a written notice that includes:

• The amount of the debt
• The name of the original creditor
• A statement that you have 30 days to dispute the debt

If you send a written dispute within those 30 days, the collector must stop all collection activity until they can verify the debt is valid and provide proof. This is important because:

• The amount might be wrong
• The debt might not be yours
• The statute of limitations might have expired
• The debt might have already been paid

Always request validation in writing, even if you think the debt is legitimate. It protects you and ensures the details are accurate.

How to Negotiate With Collection Agencies

If the debt is valid and you owe it, negotiation is often your best path forward. Collectors — especially those who bought the debt — paid very little for it and have room to negotiate.

Pay for Delete

Ask the collector to remove the account from your credit report in exchange for payment. Get this agreement in writing before you pay. Not all collectors will agree, but it’s worth asking.

Lump Sum Settlement

Offer to pay a percentage of the balance in one lump sum. Start low — around 25-30% of the amount owed — and be prepared to negotiate up. Collectors who bought debt for pennies on the dollar may accept 40-60% as a settlement.

Payment Plan

If you can’t pay a lump sum, propose a payment plan with fixed monthly amounts. Get the terms in writing, including the total amount, payment schedule, and what happens when you complete the plan.

Key Negotiation Tips

• Don’t give them access to your bank account. Pay by check or money order so they don’t have your banking details.
• Get everything in writing. Verbal promises are worthless. Don’t send money until you have written confirmation of the agreement.
• Don’t acknowledge the debt verbally until you’ve verified it. In some states, acknowledging an old debt can restart the statute of limitations.
• Stay calm and professional. Collectors are people doing a job. Being polite but firm gets better results than getting upset.

How Collections Affect Your Credit

A collection account on your credit report is a significant negative mark. It can drop your score by 50-100 points or more, depending on your starting score.

Key things to know:

• Collections can stay on your credit report for up to seven years from the date of the first missed payment with the original creditor.
• Newer credit scoring models (FICO 9, VantageScore 3.0 and 4.0) give less weight to paid collections and ignore medical collections entirely.
• Paying a collection doesn’t remove it from your report unless you negotiate a “pay for delete” arrangement.

When to Seek Help

If you’re dealing with aggressive collectors, multiple collection accounts, or potential lawsuits, consider getting help:

• Nonprofit credit counselors can negotiate on your behalf and help you create a plan.
• Consumer law attorneys can help if your rights are being violated. Many offer free consultations for FDCPA cases.
• Legal aid organizations provide free legal help if you can’t afford an attorney.

Bottom Line

When debt goes to collections, the agency either works for your original creditor or has bought your debt for a fraction of what you owe. You have significant rights under the FDCPA, including the right to validate the debt and request that collectors stop contacting you. If the debt is valid, negotiation — especially for a lump sum settlement or pay-for-delete arrangement — can save you money and protect your credit. Always get agreements in writing before making any payment.