Should You Pay the Collection Agency or the Original Creditor?

When facing an outstanding debt, individuals often wonder whether to pay the original creditor or a debt collection agency. This situation can create uncertainty about the correct course of action. Understanding the roles of these entities and the appropriate steps can provide clarity and help navigate this financial challenge.

Original Creditors and Collection Agencies

An original creditor is the entity that initially extended credit or provided services, such as a bank issuing a credit card, a hospital providing medical care, or a utility company offering services. When a debt becomes delinquent, meaning payments are not made as agreed, the original creditor may initiate collection efforts.

If these internal efforts are unsuccessful, the original creditor has several options for managing the overdue account. They might retain the debt but assign its collection to a third-party collection agency. Alternatively, the original creditor may sell the debt outright to a debt buyer, which is a type of collection agency. In this scenario, the debt buyer purchases the debt and then owns it, gaining the right to collect the full amount from the consumer.

When a debt is sold, the original creditor updates its records to show a zero balance, as they no longer own the debt. The collection agency, whether acting as an agent or a debt buyer, assumes the responsibility of contacting the consumer. If sold, the debt buyer becomes the new creditor, and payments are directed to them.

Verifying the Account Details

Before considering any payment, it is important to verify the accuracy and legitimacy of the debt. Consumers should seek specific information to confirm the debt:

• The original creditor’s name
• The account number
• The original amount
• The current balance
• The date of the last activity on the account

The Fair Debt Collection Practices Act (FDCPA) establishes guidelines for third-party debt collectors, prohibiting abusive practices. Under the FDCPA, a debt collector must send a written validation notice within five days of their initial contact. This notice should include the debt amount, the name of the creditor, and a statement of consumer rights, including the right to dispute the debt within 30 days.

If this validation notice is not received or if further details are needed, a consumer can send a debt validation letter requesting more information. This letter should be sent by certified mail with a return receipt requested, creating a legal record of the communication. The request should ask for documentation proving the debt, such as a copy of the original contract, an itemized accounting of the debt, and evidence that the collector has the legal right to collect. If a debt collector cannot provide this verification within 30 days of receiving a written dispute, they must cease collection efforts until they do.

Approaches to Settling Debt

Once the debt details have been verified, various approaches can be taken to settle the outstanding amount. The decision to pay the original creditor or the collection agency depends on whether the debt was assigned for collection or sold outright. It is advisable to contact the original creditor as soon as possible if the debt is overdue, as they may offer more flexible repayment options before the debt is transferred.

Paying the Original Creditor

Paying the original creditor might still be an option if the debt has not been formally sold to a collection agency, but rather assigned for collection. In such cases, the original creditor still owns the debt and may be more willing to negotiate a payment plan or a reduced settlement amount. To pursue this path, it is important to confirm that the original creditor still owns the debt. This can often be determined by checking if the original creditor is still reporting the balance on credit reports.

If the original creditor agrees to a settlement, secure all agreed-upon terms in writing before making any payment. This written agreement should specify the total amount to be paid, any agreed-upon reduction, and how the debt will be reported to credit bureaus upon payment. A written agreement provides proof of the terms and prevents future disputes.

Paying the Collection Agency

If the debt has been sold to a collection agency, that agency now owns the debt, and payments must be directed to them. Collection agencies often purchase debts for significantly less than the face value, which can create an opportunity for negotiation. Consumers can attempt to negotiate a reduced settlement amount, potentially paying a percentage of the original debt, such as 30% to 50%.

When negotiating with a collection agency, it is crucial to get all terms in writing before sending any payment. This written agreement should detail the agreed-upon settlement amount, a clear statement that payment of this amount will satisfy the debt in full, and how the debt will be reported to credit bureaus (e.g., “paid in full” or “paid as agreed”). Without a written agreement, there is no guarantee the agency will honor verbal promises.

General Payment Best Practices

Regardless of whether payment is made to the original creditor or a collection agency, certain best practices should be followed. Always pay with traceable methods, such as a money order, certified check, or electronic transfer that provides a clear transaction record. Avoid providing direct access to bank accounts, such as through automatic withdrawals. It is also important to retain copies of all correspondence, agreements, and payment receipts for an extended period, typically several years, as proof of payment and settlement.