What are Collections Accounts? When Lenders Send Past-Due Accounts to Collection Agencies

If you’re currently involved with a debt collection agency and need some answers about the process, you’ve come to the right place. If you’re lucky enough to have never gotten a call from a debt collector, I’ll provide all the information you need to keep it that way.

When a lender declares a borrower’s accounts in default and charges off debts after 180 days of delinquent payments, it may sell that account to a debt collection agency at a fraction of its debt value. Then, it becomes a collections account.

Collections accounts include borrower information, account history, and payment details associated with defaulted loans for sale or transfer to debt collection agencies.

Debt collectors then try to hold borrowers accountable for their legal obligations. Debt collection is the last opportunity for a lender or an agency to produce revenue from a loan. You can resolve your debt situation in many ways before it ever reaches a collections account, so let’s explore them together.

Debt collectors aren’t necessarily out to get you. I think it’s more realistic to view them as performing a kind of financial due diligence to ensure the most accessible and reasonably priced credit for everyone.

Besides, debt collection agencies today are a far cry from the stereotypes and strong-arm tactics of the past. Below, I’ll even show you how automation and artificial intelligence are bringing new levels of efficiency and civility to modern debt collection.

In and of themselves, collections accounts are digital records and documentation transferring ownership of a debt. They’re significant because of how they fit within the credit and collection system as a whole.

How Lenders Deal With Nonpayment

You’ll be shocked to hear this, but lenders don’t give you money out of the goodness of their hearts. They’re businesspeople looking for a return in the form of interest. When they stop hearing from you, they start wondering what’s up.

Alarm bells begin going off at 30 days past due, and efforts to communicate and collect ramp up from there. Each lender controls how they reach out, but there comes a time when they all throw up their hands.

That delinquency cutoff point usually comes at 180 days. The lender declares the loan in default and performs accounting actions to charge off the outstanding debt as a loss. The borrower gets another in a monthly series of credit score decreases, but this time, the number falls deeper.

More on that later. Now, the lender has to decide what to do with the debt. Often, lenders bundle outstanding loans into portfolios for sale to specialized debt collection agencies.

Prices for those portfolios of collections accounts range widely according to their recoverability potential. Some sell at 5% of the total outstanding debt, while others command more.

The delinquency cutoff point for declaring a loan in default arrives when the loan is 180 days past due.

Finalization of a sale to a debt collection agency usually signals the end of the original creditor’s involvement. Moving forward, it’s up to the agency to act as the new creditor.

Types of Debts That Can Go to Collections

Debt collectors understand they’re playing a numbers game. They don’t expect to collect on every outstanding loan. Their goal is to recoup the cost they paid for the portfolio and earn a profit.

Many agencies specialize in collecting certain forms of debt. Borrowers should understand that any money they owe is potentially subject to collections activity.

That impartiality toward debt causes collections agencies to seem a little hardhearted because borrowers have much more control over incurring certain kinds of debt than others.

For example, overshooting your capacity to repay your credit card bill is as common as new sandals in spring, but many can choose not to run up credit card debt.

Medical debt doesn’t fall in the same category in terms of wants versus needs, yet it is also subject to collections after 12 months of delinquency with consumer protections. So are mortgage payments, rent payments, and utility bills despite their obvious importance.

Unpaid taxes and child support are on the list, as are auto and student loans, though they bring the self-improvement benefits of transportation and education.

Personal loans and other types of consumer debt fall into what I think is a middle ground. It’s great to use credit to advance your goals, but you’re setting yourself up for a world of trouble if you use it to recover from past mistakes.

The Process of Debt Collection

It can be a challenge to look past all the different circumstances that could cause a loan default to arise and just concentrate on how all the numbers impact the lender’s bottom line.

So, do yourself a favor and understand why taking out a loan is essential to you before you sign the papers. Have a well-thought-out plan for how you’ll use the money to produce a benefit you would not have been able to achieve otherwise.

The first action a debt collector typically performs after assuming an account is to send written notice of the transfer of ownership along with account details.

The federal Fair Debt Collection Practices Act (FDCPA) governs much of what transpires next. Below, I’ll explain the details of the FDCPA’s role.

Then, the letters, calls, and emails start. I’ll risk a bad rhyme by saying that contact attempts escalate when people don’t reciprocate.

Collections agencies are good at what they do. They will sometimes even go so far as to pursue legal actions and judgments against borrowers when they believe the expected return is worth the investment in legal resources.

Your credit score has been taking hits this whole time. Regardless of why you got into debt, the system now has you pegged as a credit risk. Your low credit scores warn prospective future lenders not to do business with you or to make you pay for the privilege.

The three major U.S. credit bureaus, Equifax, Experian, and TransUnion, have teamed up to provide consumers free access to their credit reports at AnnualCreditReport.com. Download reports (which don’t include scores) from all three bureaus as often as weekly to stay abreast of your credit history changes.

Get free weekly access to reports from all three major credit bureaus at AnnualCreditReport.com.

Credit scores spiral downward as borrowers transition from delinquency to default and go into collections. Fortunately, you have ample opportunity to get off the hamster wheel.

Immediate and Long-Term Consequences

We talked a little bit above about credit scores absorbing a succession of dings after several months of nonexistent payments. There’s always an opportunity to right the ship, but it gets harder the longer you avoid the problem.

Scores can drop by at least 50 points — and often by as much as 100 — when the bureaus receive notice of collections activity. Credit models may show some leniency if your previous payment history is good and the default amount is relatively small.

However, because payment history contributes 35% toward your FICO score, your score takes a hit regardless of your previous credit status.

What’s more, you’ll struggle to overcome the setback. It usually takes seven years for collection information to disappear from your credit report. Your score can improve during that period if you change your behavior and work with financial services providers to rebuild your credit.

A great way to show lenders and the bureaus that you’ve changed your ways is to pay your debt. Collections agencies want to work with you so they can check the earnings box and move on.

Lenders also hope to work with you again. They’d love nothing more than for you to pay the debt.

Not paying means a bigger and longer-lasting ding on your score — it’s that simple. Scoring models give you credit (so to speak) for paying the debt. Some newer models, such as FICO 9 and VantageScore 3.0 and 4.0, wipe paid collections accounts off their records entirely. 

Although other scoring models, including the widely used FICO 8, may preserve a paid collections account in your credit history, it won’t impact your score as much as an unpaid account.

How to Mitigate the Damage

We’ve already noted that collections agencies don’t expect to collect the total amount of every account (although, legally, that’s what they’re due). They’re looking to collect what’s feasible, factoring their assessments of borrowers’ ability to pay against their expenses.

People who may be dealing with collections agents for the first time may not fully appreciate how willing they are to work with you. They’re often prepared to meet in the middle by accepting smaller monthly payments or a lower final payoff amount.

Some agencies will accept a “pay-for-delete” settlement where they remove some or all of the debt from your credit report in exchange for payment.

We discussed above that some agencies specialize in collecting certain forms of debt. An agency specialized in collecting medical debt may have different negotiation parameters than an agency that collects unpaid credit card debt.

Get any settlement agreement in writing before paying a collections debt in full or instigating a payment plan. Make sure the agency also confirms in writing when you pay your debt in full.

Rebuilding Your Credit After Collections

That said, nothing magical happens when you finally pay your collections debt. You still have to prove to lenders that you can be a good customer. That means applying for new credit.

Do your research on a site like this one. Lenders have created many credit products, including credit-builder loans and secured credit cards, that allow consumers rebuilding after financial setbacks to report on-time payments to the three bureaus. 

These products typically use cash deposits as collateral, so be prepared to save up for the privilege of rebuilding your credit.

However, you’ve got to practice good financial habits moving forward, or you’ll be back in the same boat before you know it. Pay all your bills on time. Use apps to set up automatic payment reminders to ensure you don’t forget. Financial discipline is the key to future credit access.

Also, I strongly recommend that you visit AnnualCreditReport.com as often as weekly to download new credit reports. Now’s the time to begin looking out for credit report errors, which can negatively impact credit scores through no fault of the borrower.

It should come as no surprise that Equifax, Experian, and TransUnion each have procedures for disputing credit report errors online or by mail or phone. 

If you find a mistake or even something you just think might be a mistake, document it through proof-of-payment information, identity theft reports, or other evidence and contact the appropriate bureau. Each of the bureaus has excellent information to guide you.

Federal legislation requires credit bureaus to remove information on your reports within 30 days if they find it to be inaccurate.

Fortunately, borrowers aren’t totally at the mercy of collections agencies, although it may seem that way up to now. Far from it.

The federal Fair Debt Collection Practices Act (FDCPA) provides ample legal rights and protections to those who find themselves in contact with a collection agency. The FDCPA even governs how and when agencies can communicate with them and in what manner.

Your Rights Under the FDCPA

To start, the FDCPA requires agencies to prove the debt actually exists. Lenders who sell collections accounts to agencies commonly include loan agreements and other original documents to meet this requirement.

The FDCPA explicitly prohibits the shenanigans of the debt collection industry of decades ago, limiting contact hours, controlling language, and policing communications for accuracy. 

It requires agencies to deal in good faith, confine contact to reasonable hours, and verify on request that what they say is true.

The FDCPA requires transparency and prohibits threatening or harassing contact from debt collectors.

Agencies may contact you by phone, mail, email, or text message to collect the debt, contact third parties to update your contact info, and even sue you when they decide it’s the best strategy.

But the FDCPA prohibits agencies from discussing your account with any third party or harassing or abusing you in any way. That includes threats of violence and obscene language, of course, but it even includes repeated calls designed to harass or annoy.

It also prohibits agencies from pursuing lawsuits regarding “time-barred” debts: debt that has been on the books too long to allow collection. Every U.S. state has laws governing the statute of limitations for collections accounts, which typically ranges from three to six years.

How to Handle Collections Calls

Remember from above that debt collectors typically send written notice of the transfer of ownership along with account details when they assume a collections account. That gives the borrower an opportunity to review the notice thoroughly and calmly.

It’s also a reminder that it’s always a good idea to open your mail, even when you think it’s just junk. 

Usually, debt collectors these days are competent professionals, not goons with baseball bats. When you do receive a collections call, it’s essential to stay in the moment and not panic. 

Collectors are ready to provide personal identification information, so ask for it and the details of the debt, including the original creditor and the amount you owe.

The best strategy is to direct the agencies to communicate in writing moving forward. Written communication provides a paper trail and ensures all parties stay on the same page.

Request a debt-validation letter within 30 days of initial contact. Carefully review the information in the debt validation letter to confirm the debt is yours and represented accurately on your credit report.

If it’s not, dispute it. The FDCPA requires agencies to communicate dispute processes clearly, and they must stop collection efforts until they provide additional verification of the debt.

Additional Recourse for Consumers

If you’re wrong, you’re wrong. I wouldn’t want any reader to come away from this article thinking there are loopholes or exceptions around unpaid debt.

It’s better never to go down that road. Take this as good-natured advice from a person who has learned through experience. Although I never let a debt get to collections, there were times in my younger years when it was a definite possibility, if you catch my drift.

Despite all the protections we discussed above, if you still feel a debt collector has acted unlawfully or taken advantage of you, the U.S. Consumer Financial Protection Bureau (CFPB) may be the answer.

The U.S. Consumer Financial Protection Bureau allows consumers to file complaints against all financial services providers, including debt collection agencies.

Through the CFPB, consumers may file complaints against financial services providers, including debt collection agencies. As usual, documentation is crucial in these situations, so please do your due diligence by attaching statements and other communications as needed.

Ample legal advice is also available online or through local offices. A consumer rights attorney can look at your case and recommend actions under the FDCPA. Legal firms sometimes provide free consultations.

Financial consumers should understand that ignoring an attempt to collect a debt might be the most counterproductive thing you can do. Financial services bring many benefits to consumers. 

Betraying a lender’s confidence and then continuing to obstruct the system at the point of collections is like flipping the off switch on prospects for prosperity.

I wish I could personally guarantee that 100% of the information you’ll find online about collections accounts recommends dealing with debt before it goes to collections. But there’s probably someone out there with a different song to sing.

But here, we’re all about doing the right thing when it comes to money. We think the right thing to do when a collections agency contacts you is never to let it happen in the first place.

Whether you’re a prime credit consumer or rebuilding from the ground up, check out all we have to say about learning and maintaining responsible financial habits. Your credit report (not to mention those you love and who love you back) will appreciate it.

But if it comes to pass that a collection agency becomes part of your life, handle it like a pro by using the strategies in this article. 

The more you understand the process and your rights, the more you can employ effective strategies to minimize the impact of a collections account on your credit.