# Collection Agency: Definition, How It Works, and Regulations

> **Definition**
>
> A collection agency is a company hired by lenders or creditors to recover overdue funds from accounts in default.

A collection agency is a company used by lenders or creditors to recover funds that are past due or from accounts that are in default. Often, a creditor will hire a collection agency after it has made multiple failed attempts to collect its receivables. A [lender](https://www.investopedia.com/terms/l/lender.asp) may outsource the debt-collection activity to a collection agency, or it may have an internal department or a debt-collection subsidiary that would handle the job.

### Key Takeaways

*   A collection agency is a company that lenders use to recover funds that are past due or from accounts that are in default.
*   Collection agencies work closely with lenders to try to retrieve delinquent funds.
*   Collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA) and bound by rules about what they can and cannot do to collect funds.

## How a Collection Agency Works

[Creditors](https://www.investopedia.com/terms/c/creditor.asp) will often hire a collection agency after a [borrower](https://www.investopedia.com/terms/d/distressedborrower.asp) is 60–90 days or more past due with a debt. The delinquency typically will be reported to the three major [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp)—Equifax, Experian, and TransUnion. Reputable collection agencies abide by the Fair Debt Collection Practices Act (FDCPA) when it comes to contacting you and trying to collect the debt.

> **Fast Fact**
>
> While creditors sometimes hire collection agencies to collect debt on their behalf, they also sometimes sell debt, often for substantially less than the amount of the debt. In these cases, the collection agency becomes the new creditor.

### When a Borrower Pays

If the borrower pays the [debt](https://www.investopedia.com/terms/d/debt.asp) as a result of the collection agency's efforts, then the creditor pays the collection agency a percentage of the funds, or assets, that it recovers, depending on the terms of the agreement.

### When a Borrower Does Not Pay

If the borrower will not or cannot cover their [arrearage](https://www.investopedia.com/terms/a/arrearage.asp), the collection agency can update the borrower’s credit report with a "collection" status, which leads to a drop in the individual’s [credit score](https://www.investopedia.com/terms/c/credit_score.asp). A low credit score can affect a person's chances of obtaining a loan in the future, as an account in collections can remain on their credit report for seven years.

Collection agencies deploy multiple strategies to try to retrieve funds, such as the following:

*   Calling the debtor’s personal and office telephones
*   Mailing numerous late-payment notices to the debtor
*   Contacting a debtor’s family, friends, and neighbors to confirm the debtor’s contact information
*   Appearing at the individual’s front door

## Debt Collection Agency Regulations

Third-party collection agencies—but not creditors' in-house collection departments—are bound by the [Fair Debt Collection Practices Act (FDCPA)](https://www.investopedia.com/terms/f/fair-debt-collection-practices-act-fdcpa.asp), of which some rules are cited below.

A debt collector may not do the following:

*   Proceed to collect an old debt that has been charged off as "uncollectible"—the debtor has either filed for bankruptcy or cannot be located
*   Legally seize assets from a debtor—unless the collection agency has won a lawsuit against a debtor
*   Physically harm or threaten to harm a debtor in an attempt to extract a payment
*   Contact an individual at work if they have explicitly stated that their employer doesn't approve of such calls
*   Contact you more than seven times during a seven-day period

A debt collector may, however, do the following:

*   Attempt to collect a debt on which the statute of limitations—usually between four and six years from the first day of default—has run out if you live in a state that allows this practice.
*   Call an individual between 8 a.m. and 9 p.m. only
*   Contact the debtor’s employer about overdue child support and alimony, federal [student loans](https://www.investopedia.com/terms/s/student-debt.asp), or taxes

## What Does a Collection Agency Do to You?

A collection agency can sue you for the debt you owe. If the debt collector wins the lawsuit, it also can get a court order to take money from your bank accounts or your paychecks.

## What Happens if You Don't Pay a Collection Agency?

If the collection agency has a court order against you, you could be arrested if you don't comply. As part of a lawsuit, you might be required to provide financial information or to testify. Failing to do so could also lead to a warrant for your arrest.  

## Is it Worth Paying a Collection Agency?

It depends on the specifics of your situation. If you can afford the debt you owe to the collection agency, it's likely in your best interests to pay the debt. Taking care of the debt can help you begin to repair any damage the debt did to your credit, and it helps you avoid a lawsuit. However, if you have more debt than you can handle, it is advisable to seek professional legal and financial assistance to determine if filing for bankruptcy is [your best course of action](https://www.investopedia.com/debt-relief-vs-bankruptcy-understanding-your-options-8419029).

## The Bottom Line

Companies sometimes will outsource collection efforts on past-due accounts. While this can be a cost-effective approach for creditors, being contacted by a collection agency can be stressful for those owing the debt. In most cases, it is best to pay the debt as quickly as possible if you are contacted and do, in fact, owe the debt. Failing to act quickly can damage your credit score further and possibly lead to a lawsuit. Keep in mind, though, that collection agencies are bound by the FDCPA, so it's also a good idea to familiarize yourself with the rights you're afforded when contacted by a collection agency.

> **Article Sources**
>
> 1.  Federal Trade Commission. "[Fair Debt Collection Practices Act](https://www.ftc.gov/legal-library/browse/rules/fair-debt-collection-practices-act-text)."
>     
> 2.  Consumer Financial Protection Bureau. "[Understand How the CFPB's Debt Collection Rule Impacts You](https://www.consumerfinance.gov/about-us/blog/understand-how-cfpb-debt-collection-rule-impacts-you/)."
>     
> 3.  Federal Trade Commission. "[Debt Collection FAQs](https://consumer.ftc.gov/articles/debt-collection-faqs)."