Generally, there are three phases to the debt collection process:

  1. For the first six months of your delinquency, you usually will deal with your creditor’s internal collector, which is sometimes referred to as a first-party agency (you, the debtor, are the second party). This may be an ideal time to try and settle your debt, since no middleman is involved and your lender still has an incentive to maintain a positive relationship with you.
  2. Once your lender has decided that you aren’t going to repay your debt, it will be assigned to an outside organization, sometimes known as a third-party agency. At this point, the debt is still owned by, and owed to, the original creditor. If the third-party agency is successful in recovering all or part of the debt, it will earn a commission from your creditor, which can either be in the form of a fee, or a percentage of the total amount owed.
  3. In the third phase of the process, your original creditor writes off your debt and sells it — often for pennies on the dollar — to an outside collection agency, sometimes known as a debt buyer. Your creditor is no longer involved. The collection agency is still trying to recoup as much of the debt as it can, in order to turn a profit on its purchase.

In recent years, creditors have been turning over more of their delinquent accounts to debt-collection law firms, rather than to traditional bill collectors. The idea is that communication from a lawyer makes a greater impression, thereby increasing the possibility of repayment.

Initial Contact from Debt Collectors

Debt collectors are permitted to contact you by every communication system available – phone, letters, email or text message – but there are rules they must follow or they are in violation of the Fair Debt Collection Practices Act (FDCPA). Those rules include:

  • They must identify themselves as a debt collection agency and give their name and the address for the collection agency.
  • They must tell you the name of the creditor (company or person you owe), the amount you owe and how you can dispute the debt or seek verification of the debt.
  • If the debt collector does not provide verification information on the first communication with you, he must send written notice with that information within five days of the initial contact.
  • Prohibits a collection agency from discussing your debt with your family, friends, neighbors or employer.
  • Limits the times of day collectors can call you.
  • Prohibits the use of slurs, obscenities, insults or threats.
  • Provides remedies for consumers who wish to stop collection agencies from all contact.
  • Requires collectors to verify all debts and end collection procedures if verification is not forthcoming.

Legal Action vs. Debt Collectors

If a debt collection agency has violated your rights under the FDCPA through repeated contact, abuse, threats, misleading information or false representation, you can sue them in state court.

The burden of proof is on you, but if the judge rules in your favor, you can be awarded $1,000 in statutory damages plus attorney’s fees. If you take this route, it is best to hire an attorney to represent you. If you take the case to state court, you must do so within one calendar year from the date of the violation.

If you want to handle the matter yourself, you can sue in small claims courts. The process is faster, but compensation for damages usually is limited.

Many disputes with debt collectors wind up in arbitration hearings. Businesses, especially credit card and cell phone companies, have clauses in contracts with consumers that say disputes must be settled in arbitration.

If you are uncertain whether your rights have been violated, you can contact the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB) with questions about the situation. You also can file complaints with the FTC, CFPB or your local state attorney’s office.