Understanding the Debt Negotiation & Collection Process - Part 2

After a balance is charged off in the debt negotiation process, it is typically sold to a debt-buyer, who purchases the right to collect your debt in a large portfolio of other delinquent debts for as little as 1 cent on the dollar. That is, if the total portfolio amounts to $100 million of debt, the debt-buyer bought it for as little as $1 million. This may sound like a tremendous amount of money and it is, but relative to total portfolio of outstanding debt, it is quite discounted.

Other times the creditor may assign your account to an outside collections agency. The collection agency is paid a percentage of the amount that they collect from you, and they can only accept settlements if they are approved by the original creditor. Generally the original creditor gives them a certain percentage range to accept for full settlement of the balance depending on a number of factors like your financial hardship, whether you’re past due on your other accounts, what state you live in, the recent activity on your credit report (i.e. are you applying for other credit?).

Regardless of whether the collection agency was assigned your account or they purchased it directly in a portfolio of delinquent debts, they are governed by the Fair Debt Collection Practices Act (FDCPA), which is legislation that aims at protecting consumers from harassment. For more information about what collectors can and cannot do, please follow this link: Fair Debt Collection Practices.

Step 1: Notification by mail – Collection agencies are legally obligated to notify you by mail that they’re handling your account, although it is highly possible you may first get a phone call or the collection agency may ignore this provision of the FDCPA altogether. In this initial letter, you must also be notified of 2 things: 1) your right to dispute the validity of the debt within 30 days and 2) the letter is a communication from a debt collector and any information you provide them will be used for that purpose.

Debt Validation: Debt collectors are legally obligated to give you the right to dispute the validity of the debt under the FDCPA. The reason for this is ensure that collectors are not hounding you for a debt that you do not owe. During the time the debt is being validated, the collectors must cease all collections activity. What constitutes legitimate validation of the debt has not yet been determined---it can be as little as a letter saying, “Yes, you do in fact owe this amount to us.”

Step 2: Aggressive Phone Calls – Once the debt has been validated, assuming this right has been exercised, the collector starts calling you, sometimes at work or your parents’ house. They may threaten to sue you, garnish your wages, or anything else that will increase the likelihood you’ll pay in full. This may continue for several months or much longer, and once it has become clear that collecting the full balance is impossible at this time, the collector will stop calling, send your account to another agency, or send your account to a lawyer for legal collection. For information about the next step in the debt negotiation process, follow this link: legal debt negotiation.