What Is a Collection Agency? How It Works & Your Rights

A collection agency is a company that pursues payments on delinquent debts. These debts can originate from credit cards, medical bills, personal loans, utilities, or business invoices. When creditors cannot collect after a certain period, generally 90 to 180 days, they either hire a collection agency or sell the debt to a third party.

What Does a Collection Agency Do?

A collection agency pursues overdue debts on behalf of creditors by contacting debtors via calls, letters, or emails. They verify and validate balances, negotiate payment plans or settlements, and, if necessary, initiate legal action, all while adhering to federal and state debt-collection laws.

There are three primary types of collection agencies:

• First-party agencies: These are internal departments of the original creditor.

• Third-party agencies: These are hired to collect on behalf of the creditor.

• Debt buyers: These purchase delinquent accounts and attempt to collect the full amount.

How Do Collection Agencies Work?

Here's a step-by-step breakdown of how the collection process typically unfolds:

1. Debt Becomes Delinquent

Once a borrower misses payments for a specific period (usually 30, 60, or 90 days), the account is flagged as delinquent.

2. Creditors Take Action

The original creditor may:

• Attempt to collect internally (first-party).

• Send it to a third-party agency.

• Sell the debt to a debt buyer at a discounted rate.

3. Contact Begins

Collection agencies begin contacting the debtor using:

• Phone calls

• Letters

• Emails

• Credit report notations

4. Debt Verification

Under the Fair Debt Collection Practices Act (FDCPA), the agency must send a debt validation notice within five days of initial contact. Consumers can request verification in writing.

5. Resolution Attempts

Debtors may:

• Pay in full

• Settle for less

• Dispute the debt

• Ignore it (not advised)

6. Escalation (If Necessary)

If collection fails:

• Agencies may sue.

• Courts may issue judgments.

• Wage garnishments or liens may follow, depending on state law.

Legal Framework & Consumer Protections

The U.S. has strict laws governing debt collection to prevent harassment and abuse. Here are the key regulations you should know:

1. Fair Debt Collection Practices Act (FDCPA)

This federal law:

• Prohibits threats, harassment, or deception.

• Limits call times (8 a.m. to 9 p.m.).

• Forbids contacting consumers at work (if told not to).

• Requires verification upon request.

• Violations can result in lawsuits or complaints filed with the Consumer Financial Protection Bureau (CFPB) or Federal Trade Commission (FTC).

2. Fair Credit Reporting Act (FCRA)

This governs how debts appear on credit reports:

• Negative marks can remain for up to 7 years.

• Consumers can dispute errors.

• Agencies must correct inaccuracies promptly.

3. Telephone Consumer Protection Act (TCPA)

This limits how collectors can use autodialers or leave voicemails. Consent is required for robocalls to cell phones.

4. State-Level Laws

Some states, like California and New York, have even stricter regulations, including licensing, bonding, and enhanced consumer protections.

Your Rights as a Consumer

If you're contacted by a debt collector, here's what you should do:

Request Validation

You have 30 days to request proof of the debt in writing. Collectors must pause activity until they provide it.

Dispute Inaccurate Debts

Use certified mail to dispute any false debts. Agencies must investigate and resolve disputes under the FCRA.

Send a Cease-and-Desist Letter

You can request they stop contacting you, though this may prompt legal action if the debt is valid.

Know the Statute of Limitations

This varies by state and debt type, often between 3–6 years. Once expired, the collector cannot sue; however, they may still try to collect.

Tools for Creditors: Meet The Credit App

For businesses trying to manage debt recovery while staying compliant, The Credit App offers a smarter and quicker solution.

What Is The Credit App?

The Credit App is a flat-fee credit reporting platform designed for small businesses, contractors, and service providers. It allows them to:

• Report unpaid debts to credit bureaus.

• File liens or judgments.

• Verify trade credit information.

• Track accounts receivable.

Why Use It?

• Legal and FDCPA-compliant.

• No aggressive collection tactics.

• Helps influence payment behavior without harassment.

• Integrates with e-oscar (used by Experian, TransUnion, Equifax).

When Is It Helpful?

• When traditional collection agencies are too costly or aggressive.

• For businesses that want transparency and documentation.

• To build a credit history for vendors, tenants, or customers.

What Debt Collectors Can’t Do (And What You Can Do About It)

Under FDCPA and FCRA, debt collectors cannot:

• Threaten jail time.

• Lie about the amount owed.

• Call repeatedly to annoy or intimidate.

• Talk to others about your debt (except your attorney).

If they do, you can:

• File complaints with the CFPB or FTC.

• Sue in small claims or federal court.

• Consult with a consumer law attorney.

Tips for Businesses Working With Collection Agencies

If you're a business or lender trying to recover unpaid debts:

• Choose licensed, reputable collection agencies.

• Always verify compliance with FDCPA and state laws.

• Keep clear documentation of the debt trail.

• Consider modern tools like The Credit App to report directly and ethically.

Closing Thought

Debt collection is a necessary but sensitive process. Whether you're a consumer managing overdue bills or a business seeking payment, understanding the rules makes a huge difference. With strict regulations in place, consumers are protected from harassment, and businesses have smarter, more ethical options. Online tools like The Credit App offer a balanced approach, empowering businesses to report credit and encourage payments without lawsuits or threats.