You wake up in the middle of the night to a phone call from an unknown person. When you pick up the phone, you hear a monotonous recorded message reminding you about your debts. It may seem like a nightmare, but such abusive collection practices affect millions of people all over the world
The word “collector” has become infamous in the financial industry. There are too many dirty collection tactics used to bring back the debt costs. Some of them are even recognised as illegal. Nevertheless, collection agencies still function around the globe as an indispensable part of the consumer credit landscape.
The U.S. debt collection market is huge. As of 2020, there are nearly 7,000 collection agencies in the United States, and the industry’s annual revenue is about $13.4 billion. To compare, the market size of the debt-collection-agencies industry in the UK is only £1.4 billion.
A collection agency is a separate company authorised by lenders to collect bad debts. Most collection agencies are third-party entities. However, some first-party agencies are subsidiaries of the company a debt is owed to. Collection agencies deal with debts of all types: credit card, medical, car loans, personal loans, business, student loans, unpaid utility and cell phone bills. At the same time, they typically specialise in a few types of debt they collect.
The collectors usually receive a fee for their services – a certain percentage from the amount of debt they are able to recover. A typical debt recovery commission is 15% to 35%. With certain high-value debt types like mortgages, the amount may be higher. However, there may be other payment models too. For example, collection agencies can charge hourly or flat rates for attempting to collect the debt, or purchase the debt for less than the amount owed, hoping to recover the entire amount and make a profit. In the latter case, the agency is called a debt buyer.
Collection agencies typically start contacting debtors after the original creditor has made numerous unsuccessful attempts to collect the amount owed. The communication may start on milder terms, but it often becomes more aggressive with time.
On behalf of the creditor, debt collectors use letters, emails, and phone calls to contact delinquent borrowers and try to persuade them to repay what they owe. However, they can only discuss debt repayment, not force it. Only a court order may oblige the debtor to repay a certain amount to the particular creditor. A court judgment may legally allow a collector to withhold money from your paycheck and bank accounts, though the collector must contact the debtor’s employer and bank to request the money first.
In most countries, contract laws allow financial institutions to hire third parties to deal with the past due accounts and payments. It helps banks, credit agencies, mortgage companies, retailers, health care providers, landlords, and all those who provide services in advance to continue with their usual business without disruptions for delinquent debts.
There are no international laws that regulate debt collection, so every country may have its own policies regarding the practice. Nevertheless, some rules are pretty commonplace in many regions.
- Agencies must be authorised to carry out debt-collection activities;
- When they contact a debtor they must clearly state which original creditor entity they represent;
- Debt collectors may not use obscene or abusive language, threaten customers, or commit violence in an attempt to recover the money owed;
- Collection agencies are prohibited from calling during the night, or using repeated automated calls non-stop;
- They should not falsely imply they represent a legal body or a governmental institution, thus, misleading customers and threatening with arrest;
- Collection agencies should not engage in any unfair, deceptive, or abusive practices even if they aren’t specified with local laws;
- For difficult-to-collect debts, collection agencies may negotiate settlements with consumers for less than the amount owed (if that is authorised by the original creditor);
- Debt collectors may refer delinquent cases to lawyers who file lawsuits against customers who refused to pay;
- Collection agencies may not collect debts after the legal deadline;
- They may not collect debts from the relatives or friends of a debtor who are not co-borrowers or loan guarantors;
- Collectors may not visit debtors in person or harass them in any possible way.
Since many laws regarding debt collection are inconsistent and customers do not know their rights, shady collection agencies may distort the real delinquency outcomes and use psychological pressure tactics to get their money. According to Finance Watch, over 31% of debtors have had their personal network approached by debt collectors, whereas 17% of debtors have experienced threats of violence including physical harm if they don’t repay the money owed.
In the past five years, the Federal Trade Commission in the US has filed lawsuits against 180 debt collectors and banned 63 of them, winning more than $220 million in judgments. In fact, every American citizen who is affected by such illegal practices, is encouraged to lodge complaints with their state attorney general and the FTC. They can also file lawsuits to collect up to $1,000 from debt collectors that cross the line under the federal Fair Debt Collection Practices Act.