What Are Third-Party Collections and What Are Your Rights?

When a debt remains unpaid, the original creditor may transfer collection responsibility to an external entity. This marks the beginning of third-party collections, where specialized agencies recover outstanding balances. This article explains the nature of these collections, their processes, and the legal protections for individuals.

Defining Third-Party Collections

Third-party collections involve an entity separate from the original creditor attempting to recover overdue funds. Unlike first-party or in-house collections, where the original company or its internal department pursues the debt, a third-party agency operates independently. These agencies are specifically hired by businesses to recover outstanding debts on their behalf.

Original creditors often engage third-party agencies for several reasons, including a desire to focus on their core business operations. They may lack the internal resources or specialized expertise required for effective debt recovery. Outsourcing to these agencies can also reduce the creditor’s internal costs associated with collection efforts.

The transfer of debt to a third-party agency can occur through debt assignment or outright sale. In debt assignment, the original creditor retains ownership of the debt but grants the agency authority to collect it. Alternatively, a creditor might sell the debt to the agency, often at a discounted rate, making the agency the new owner of the debt. This means the individual then owes the debt directly to the collection agency, which has purchased the right to collect the full amount.

The Collection Process

Once a third-party collection agency acquires or is assigned a debt, they typically initiate contact through various methods. Common approaches include phone calls, letters, and sometimes emails, aimed at reminding the debtor of the outstanding payment. Agencies utilize specialized tools, like skip tracing software, to locate individuals who may have moved or changed their contact information.

The general sequence of events often begins with initial contact, followed by attempts at negotiation to arrange a payment plan or a reduced settlement. If these efforts are unsuccessful, the agency may escalate their actions. This escalation can involve sending formal notices and, in some cases, pursuing legal action to recover the funds.

Collection agencies operate under different business models, which can influence their approach. Contingency-based agencies typically receive a percentage of the amount successfully collected, often ranging from 25% to 50% of the recovered debt, giving them a direct incentive to collect. Debt buyers, on the other hand, purchase debts at a fraction of their original value and then seek to recover the full amount, becoming the new creditor. This distinction can sometimes affect their willingness to negotiate.

Your Rights as a Debtor

Individuals dealing with third-party debt collectors are protected by the Fair Debt Collection Practices Act (FDCPA). This federal law aims to eliminate abusive practices in consumer debt collection and ensures fair treatment.

Under the FDCPA, consumers have the right to debt validation. Within five days of initial communication, a debt collector must provide written notice detailing the debt amount, creditor’s name, and the right to dispute the debt within 30 days. If disputed in writing within this period, the collector must cease efforts until verification is provided.

The FDCPA also prohibits various forms of harassment and abuse. Collectors cannot:
Use threats of violence.
Publish lists of consumers who refuse to pay.
Use obscene language.
Make false statements, such as misrepresenting the amount owed or claiming to be attorneys when they are not.
Threaten actions they cannot legally take.
Attempt to collect unauthorized interest or fees.

The FDCPA sets restrictions on when and how collectors can communicate. They generally cannot contact consumers before 8:00 AM or after 9:00 PM local time, unless permitted. Collectors are also prohibited from contacting consumers at their place of employment if they know the employer prohibits such communications. Consumers can send a written request to a debt collector to cease all further communication, which the collector must honor. This does not extinguish the debt itself. State laws may offer additional protections.

Steps to Take When Contacted

When a third-party collection agency initiates contact, taking specific actions can help manage the situation. First, verify the debt by sending a written request for validation within 30 days of their initial contact. This ensures they stop collection activities until providing proof of the debt, including the amount and original creditor. Keep a copy of this request and proof of mailing.

Maintain clear records of all interactions, noting the date, time, and content of phone calls, and retaining copies of all letters and emails. Communicating in writing creates a tangible record and helps prevent misunderstandings. You can also send a written notice to the collection agency requesting them to cease all further communication, which they must honor. This does not eliminate the debt or prevent legal action.

If you believe the debt information is inaccurate, dispute it directly with the collection agency and the credit bureaus if it appears on your credit report. Providing supporting documentation can strengthen your case. Credit bureaus must investigate disputes and correct or remove inaccurate information.

After verifying the debt and understanding your rights, consider your payment options. These may include negotiating a settlement for a reduced amount, especially if the agency purchased the debt for less than its face value. Alternatively, you might propose a payment plan to repay the full amount over time. Any agreement should be carefully reviewed and confirmed in writing.