What Is Third-Party Collections and How Does It Work?
Gain a clear understanding of third-party collections. Learn how they work and what consumers need to know about their rights.
Third-party collections play a role in the financial system, acting as intermediaries when debts are not resolved directly with the original creditor. Specialized agencies work to recover payments for overdue accounts. Understanding their functions, typical steps, and legal protections is important for individuals navigating debt. This article explains third-party collections to provide clarity on this often-misunderstood area of personal finance.
Defining Third-Party Collections
A third-party collection agency is an entity hired by an original creditor to recover outstanding debts. These agencies specialize in debt recovery, stepping in when a business’s internal collection efforts fail. Their function is to mediate between the original creditor (e.g., a bank or utility company) and the debtor.
Unlike an internal collections department, a third-party agency is an independent firm. They work on behalf of the creditor, using their resources and expertise to contact debtors and facilitate repayment. This outsourcing allows original creditors to focus on core operations while delegating the time-consuming task of debt recovery to professionals.
These agencies earn revenue through contingency fees, receiving a percentage of the amount collected, often 25% to 50% of the recovered debt. Some agencies may charge flat fees or hourly rates, depending on the agreement. A creditor might also sell the debt outright to a “debt buyer” at a reduced price. The debt buyer then owns the debt and attempts to collect the full amount for profit.
The Collection Process
After an original creditor exhausts its own attempts to collect an overdue payment (typically 90 to 180 days of non-payment), the debt may be assigned to a third-party collection agency. The agency then attempts to contact the debtor. This initial outreach occurs through phone calls, emails, and postal letters.
Legitimate debt collectors are required by law to send a debt validation letter within five days of their first contact with the debtor. This letter must include the amount owed, the name of the original creditor, and a statement of the consumer’s right to dispute the debt. If the consumer disputes the debt in writing within 30 days of receiving this notice, the collector must cease collection efforts until they provide verification of the debt.
Agencies may attempt to negotiate a settlement with the debtor. This can involve setting up a payment plan or offering a reduced lump sum settlement. If negotiation efforts are unsuccessful and the debt remains unpaid, the agency may escalate actions, including reporting delinquency to major credit bureaus. If all other efforts fail, the agency might initiate legal proceedings to recover funds, potentially leading to court judgments, wage garnishment, or liens on assets.
Consumer Protections
Consumers have legal protections when dealing with third-party debt collectors, primarily under the federal Fair Debt Collection Practices Act (FDCPA). This law prevents abusive, deceptive, and unfair debt collection practices, applying to third-party collectors but generally not to original creditors. The FDCPA sets guidelines for how debt collectors can communicate with consumers.
Debt collectors cannot contact consumers before 8:00 a.m. or after 9:00 p.m. local time, unless the consumer agrees to calls outside these hours. They also cannot contact consumers at their place of employment if the employer prohibits such communications. The FDCPA also limits call frequency; a debt collector violates federal law if they call more than seven times within seven consecutive days, or within seven days after a telephone conversation about the debt.
The FDCPA prohibits collectors from harassing, oppressive, or abusive conduct, including using profane language or threatening violence. Collectors cannot make false statements about the debt or falsely claim legal action. A consumer can send a written “cease communication” letter to a debt collector, requiring them to stop all further contact regarding the debt, with limited exceptions. After receiving such a letter, the collector can only communicate to advise that collection efforts are ending or to notify of specific remedies, such as intent to file a lawsuit.
Types of Debt Subject to Collections
Many types of debts can be transferred to third-party collection agencies when significantly overdue. Common examples include credit card balances, often sent to collections after several months of missed payments. Utility bills for electricity, water, or gas can also go to collections after 90 to 180 days of non-payment and service disconnection warnings.
Medical bills often end up in collections due to unpaid balances, insurance coverage issues, or high out-of-pocket costs. Even with partial payments, a medical bill can still be sent to collections if the full amount is not paid within an acceptable timeframe. Other debts referred to third-party agencies include student loans, auto loans, personal loans, unpaid tuition, or late rent payments. Bank fees, overdrafts, and fines from courts or government agencies can also be subject to collection efforts.