Debt Collector: Definition, Collection Strategies, and Regulations

What Is a Debt Collector?

A debt collector is a person or organization that recovers money owed on delinquent accounts. Creditors hire debt collectors when they are owed money by individuals. Collectors are paid a flat fee or a certain percentage of the amount they collect. Some debt collectors are debt buyers, such that they purchase debt at a fraction of its face value and then attempt to recover the full amount of the debt or as much of it as they can. A debt collector may also be known as a collection agency.

Understanding Debt Collectors

When a borrower defaults on a debt, the lender or creditor may turn their account over to a debt collector or collections agency. The debt is said to have gone to collections at this point. This typically happens within three to six months of default, depending on the creditor. Overdue payments on credit cards, phone bills, auto loans, utility bills, and back taxes are examples of debts for which collectors may be responsible.

Debt collectors may contact the debtor in writing by mail or over the phone. They can call the person's personal and work phones. In some cases, they may even show up on a debtor's doorstep. Collectors may also contact a debtor's family, friends, and neighbors to confirm the individuals' contact information on file.

If the person agrees to pay the debt, the creditor will usually pay the debt collector a percentage of the money it gets back, unless they have a flat-fee arrangement.

Some debt collection agencies and other companies will purchase delinquent debt from creditors, typically for pennies on the dollar, then attempt to collect the debt for their benefit. These collectors keep all of the money they collect if they're successful.

Debt Collector Regulations

Debt collectors are regulated under the Fair Debt Collection Practices Act (FDCPA), which is administered by the Federal Trade Commission (FTC). The law, which went into effect in 1978, is designed to protect consumers against unscrupulous collection practices. It prohibits the use of abusive, unfair, or deceptive practices during the collection process. This includes the following:

• Collectors are not allowed to contact debtors before 8 a.m. or after 9 p.m.
• Collectors cannot claim that a debtor will be arrested if they fail to pay
• Collectors cannot call more than seven times within a seven-day period
• Collectors can't physically harm or threaten debtors
• Collectors cannot seize assets without the approval of a court

The law also gives debtors certain rights. For example, if you send a letter to a debt collector telling them to stop contacting you, the collector is required to comply. This means they must stop contacting you in any way, including over the phone or in writing.

The Consumer Financial Protection Bureau (CFPB) issued a new Debt Collection Rule in 2021 that further clarifies what debt collectors can and can't do. For example, when a debt collector first contacts the debtor in any way, it must provide certain information, such as the debt collector's name and address, the creditor's name, the associated account number, and the amount and itemized accounting of the debt. They must also provide information on the debtor's rights and how they can dispute the debt if they believe it is inaccurate.

People who think a debt collector has broken the law can report them to the FTC, the CFPB, and their state attorney general's office.

Example of a Debt Collector

Here's a hypothetical example to show how debt collectors work. Let's assume that Jesse owes ABC Bank $15,000 on a credit card. They've missed six months' worth of payments because they're overwhelmed by debt. The credit card issuer makes several attempts to try to collect on the arrears through its in-house collection department. After the last attempt, the bank closes the card and sends Jesse's account to a third-party collection agency to assume collection activity.

Once the account arrives, the collection agency sends a letter to Jesse advising them that it is now responsible for collecting on the account. The agency may send letters and attempt to collect the debt by contacting Jesse over the phone.

If the activity is successful, the agency may get a fee or a percentage of the outstanding balance. The rest is sent to the original creditor and the account is considered paid in full.

The Bottom Line

Debt collectors provide a useful service to lenders and other creditors that want to recover all or part of the money that is owed to them. At the same time, the law provides certain consumer protections to keep debt collectors from becoming too aggressive or abusive.