Collection Agency

Collection Agency
A collection agency is a business that is hired by a lender to recover overdue funds. The will either earn a fee on what they collect or will purchase the debt from the lender at a discount. They are known for being persistent and sometimes aggressive in their methods. They will sometimes sue a debtor and take them a court in order to legally seize their funds or assets.

What is a Collection Agency?

A collection agency is a company that is hired by a lender or creditor to recover money that is past due. Collection agencies either receive a percentage of the funds they recover or they purchase the entire debt from the lender and keep all of the funds that they collect.(1)

Collection agencies can be used to collect on all kinds of debt: credit card debt, medical debt, student loan debt, unpaid cell phone bills and more.

How does a Collection Agency work?

Collection agencies generally work in two different ways:

  • They are hired by a lender to collect outstanding debt. In exchange for collecting the debt, the agency receives a percentage of the money recovered. Usually they receive somewhere between 25-45% of the debt collected.(2)
  • The collection agency purchases the debt at a discounted rate from the lender. Any funds that the agency is able to collect on that debt are theirs to keep.

When collection agencies use the latter method, they typically buy debts in bulk. For example, a credit card company may sell many similar outstanding debts to a collection agency, and the agency then tries to collect money from all of the borrowers individually.

How do Collection Agencies get Debtors to pay?

Collection agencies will typically call borrowers and send them letters in order to convince them to repay their debt. Their methods can sometimes be aggressive, causing many collection agencies to have a reputation as harassers. In fact, consumers complain to the Federal Trade Commission about collection agencies more than any other industry.

The Consumer Financial Protection Bureau lists the following as some of the methods that constitute harassment by collection agencies:

  • Repetitious phone calls intended to annoy or abuse.
  • Obscene language.
  • Threats of violence and harm.
  • Publishing lists of people who refuse to pay their debt.
  • Calling without telling you who they are.(3)

What happens if I don’t pay a Collection Agency?

Failure to pay a collection agency will often result in them reporting it to the credit bureaus. If this happens, this information will go into the borrower’s credit report, thereby hurting their credit score. Having a bad credit score can affect a person’s chances of taking out a loan or credit card in the future, renting an apartment or even getting a job.

In some cases, collection agencies or creditors can sue in order to get back the money they are owed — unless their debt has passed the statute of limitations in their state.

What is the Statute of Limitations on Debt?

The statute of limitations on debts varies from state to state. For example, the various credit card debt limits are shown in this helpful chart. Many states have debt collection periods of 3-6 years after the first missed payment, but some states have statutes of limitation as long as 10 years.(4)

If your debt has passed the statute of limitations, you can no longer be sued by the creditor or collection agency. But the unpaid debt will still hurt your credit, so it’s always in your best interest to repay past due debts.


  1. “Collection Agency.” Investopedia. Accessed March 15, 2016
  2. Fontinelle, Amy. “How the Debt Collection Agency Business Works.” Investopedia. Accessed March 15, 2016.
  3. “What Is Harassment by a Debt Collector?” Consumer Financial Protection Bureau. Accessed March 17, 2016.
  4. Sekar, Anisha. “Credit Card Debt Statute of Limitations: A Guide to All 50 States.” Nerd Wallet. Accessed March 15, 2016.