How Do Collection Agencies Work?
If you are debating settling your debts, it is crucial that you become familiar with how collection agencies work. It is very important to compare the amount of time it will take you to raise enough funds to settle your debts against the typical collection cycle. This is one of the main reasons why I limit my debt settlement services to consumers who have an asset or a financial resource that allows them to settle their debts right away.
The information on this page will help you better understand not only how collection agencies work, but it will also explain how they typically approach collection at each stage of the collection process.
The purpose of this information is to help you understand what may happen to your accounts as they age and travel through the collection cycle.
Please understand, this is the “typical” collection cycle. It is possible your delinquent accounts could follow a slightly different path.
This page is part 2 of a 4-part series that explains how debt settlement works. If you haven’t read the previous part and you are debating settling your debts, please start here so you can gain a better understanding about the information on this page.
1-4 Months Behind
The first 4 months of delinquency is almost always more customer-service driven. You’ll almost always be contacted by a collection representative from your bank. They will generally conduct themselves in a very professional manner. The goal of their calls is to collect the amount past due.
Most creditors charge off accounts at 180 days. However, some charge off their accounts at 120 days.
5-6 Months Behind
The following 2 months are also more customer-service focused. However, your bank may elect to refer the account to a collection agency. Or, they may still handle it in-house. The goal of both the bank and the agency, at this stage of delinquency, is the same. They will attempt to collect the amount past due.
As you approach 180 days of delinquency, they will accelerate their attempts to collect from you. Their goal is to prevent your account from charging off. A charge-off typically occurs when you reach 180 days delinquency. The bank is very motivated to prevent that. When your account charges off, the bank must write off the charge-off amount from its books.
When you have a $10,000 account that charges off, the bank must subtract the $10,000 from its quarterly earnings, because it is considered a loss. When an account charges off, you still owe the money. It’s nothing more than a loss to the bank and an accounting term to you.
However, what it also means is that once your account charges off – there is no turning back.
You will no longer have the option to bring the account current.
The only way to satisfy a charge-off is to either pay it off in full, settle it, or include it in a bankruptcy.
I get two types of clients:
One type wants to regain control of their finances: their goal is to resolve their delinquencies as soon as possible and return to normal.
The other type wants an exit strategy: they want to settle all of their unsecured debts.
It isn’t generally necessary to settle all of the outstanding debt in order to achieve a comfortably affordable monthly budget.
If you don’t have an available financial resource that would allow you to settle ALL of your delinquent accounts, you may be able to lower your monthly expenses enough by reviewing your liquidity to generate funds to settle as many of your accounts as you can and then by re-aging the remaining accounts.
A re-age is a payment plan to pay your normal amount due for 3 consecutive months. Once you make your third normal payment to your credit card company, they will no longer require the past due amount to be paid and they will bring your account current.
Once the account is brought current, you will pay your normal payment from there. When you bring the account current, you cure the delinquency and begin to recover.
When I work with a client that wants to employ this approach, I go with the strategy of settling the accounts that will settle for the least amount – percentagewise – and then I re-age any remaining accounts.
This way, you can settle as much debt as you can with your available funds.
Re-aging accounts, preferably low balance ones, creates opportunities for you to have active tradelines that are reporting active payment history to your credit report.
Combining a debt settlement strategy with re-aging may allow you to solve your problem and put you in a position to where you can pay off the re-aged accounts in a non-risky way.
The advantages to this approach are:
- You gain control over your finances and lower your monthly bills by eliminating the monthly payments that were associated with the debts that you settled
- You resolve your delinquencies and begin to recover
- You have active payment history reporting to your credit reports, that in theory, will help rebuild your credit score more quickly
- You avoid the risks that are associated with settling your debts over a long period of time
6-7 Months Behind
Once your accounts charge-off, they will generally be worked internally by the recovery department of your bank. Their approach is still very customer-service focused. Your conversations will remain pleasant, but they will reflect more urgency. They will be seeking the full balance of your account.
At some point between 6 and 7 months of delinquency, your account will generally be in a state of limbo as it is either sold to a debt buyer or placed with a collection agency. It is fairly rare for accounts to be placed with collection attorneys at this stage of delinquency.
7-12 Months Behind
Once the account is placed with the collection agency, it is called a “Fresh” or “First Placement” account. These accounts are the most treasured and collectable in the debt collection world. It is common strategy for collection agencies to put their best collectors on Fresh or First Placement accounts.
Their collection approach is significantly different than the original creditors. The scope and detail that is involved in their collection efforts depends on whether they are a technology-based collection agency or a manual one.
If they are more technology based, they will conduct most of their business via a predictive dialer. Your account will be in a pool that may consist of 50,000-500,000 accounts. The detail and attention that is afforded to accounts in this environment isn’t that great. The approach will mainly consist of phone calls and letters. And the collectors won’t do a lot of investigative work like they would in a manual environment. The mantra of a technology-based collection agency is more of a numbers game. Their perspective is quantity over quality.
Whereas in a manual-based collection agency, it’s a whole different animal. In a manual environment, an individual collector is typically assigned a total of 200-300 accounts. They will work these accounts generally for 3-6 months and they will receive anywhere from 50-100 new accounts each month.
Their skip tracing efforts will be intense. Skip tracing is a term for locating information. The tools that they will use are many. They will check social networks including Facebook, LinkedIn, MySpace and Google+.
They will review your credit report and google your last known employer in an attempt to locate your current place of employment. If you no longer work there, they will probably talk to a co-worker to inquire where you may have gone.
They will use databases called LexisNexis and TLO that will more than likely provide them with the people you are related to and their phone numbers. And if they don’t have a way to reach you by phone, they are legally allowed to call your family members in an effort to locate you. Although, they are prevented by law from disclosing the nature of their call.
They will also use these databases to search for publicly known assets, such as homes and businesses that you own.
In respect to your conversations with both types of agencies, they’re going to be much more intense. Their job is to collect as fast as they can from you. They will inquire about your assets, your job, your relatives, your retirement accounts, and your life insurance policies: any possible financial resource that could be available to you.
The main difference between the conversations with a technology-based collector versus a manual is that the manual one will know a lot more about you.
It is crucial you know and understand how to react in these situations, so you may internalize the potential reactions that may be created from your communication with them.
Both technology- and manual-based collection agencies will generally service the accounts for approximately 6 months.
13 Months Behind – Expiration of Statute of Limitations
Once your accounts leave the collection agencies, typically after 6 months, they could land at other collection agencies or collection attorneys.
This is when things can start to get sketchy.
It is very possible your accounts were identified (by a manual collector, or by a collection score when with the technology collector) as being a good candidate for suit.
What makes someone an attractive candidate for suit is verifiable employment, an open checking or savings account, real property such as a house, paid or settled charge-offs on credit reports and high credit scores.
So if you’ve been working at the same place for a while, chances are they’re familiar with it. You’ll generally know if they are, because they’ve probably tried to reach you there.
In respect to checking or savings accounts, they will generally possess this information by collecting the data from your previous payments to them. When you pay someone with a check, the checking account number is on it, so they may possess this information if you’ve made any payments in the past.
In respect to your home or any non-owner occupied housing you may own, they will generally research your equity position before making a determination about its attractiveness for suit. If you’re underwater or severely behind on your mortgage, they are much less likely to view the property as an equitable reason to pursue you.
Since only 1 out of 5 people who go into collections ever pay their bill over the entire 7-year collection cycle, debt collectors pay very close attention to consumers who have previously paid or settled charge-offs and collections on their credit reports. There is a high probability that a consumer with paid or settled charge-offs and collections on their credit report will resolve the account when sued.
Consumers with high credit scores are also more likely to resolve their accounts when sued, due to the consumers desire to protect their credit from further damage.
Once you go beyond 12 months of delinquency, the “typical” disappears.
This is why, if you don’t have the ability to settle right away, I only recommend debt settlement if you can settle your debt in 24 months or less.
Ideally: in 12 months or less.
Now that you have a firm understanding of how debt settlement and collection agencies work, let’s talk about what most debt settlement companies won’t tell you…
Read Part 3: Debt Settlement Pros and Cons