Sometimes bills are overlooked, and sometimes real financial difficulties make it impossible to pay bills on time. In either case, when a bill is unpaid under the agreed-upon terms, the creditor may initiate a collection process. Some companies send a bill to collections as soon as permissible under the terms of the agreement, while others may wait as long as several weeks or even months before formally triggering collection procedures. In either case, the collection process is designed to convince debtors to bring their accounts current.

Internal Collections

Some companies have internal collection departments.
Some companies have internal collection departments.

Many large enterprises have their own in-house, or first-party collections departments. There are definite advantages for the debtor for doing so. For instance, first-party collection departments have more flexibility to negotiate terms with a debtor, forgive part of the debt, or negotiate or cancel late fees. A first-party collection department continues its activities until the debt is paid or reaches a certain “age,” generally 90-120 days past due. If the account is brought current, and there are no other issues, the account is usually returned to “good standing” status; otherwise, the account is transferred to a third-party collection agency.

Account Suspension or Cancellation

When a debt gets too old, the company will cancel the account.
When a debt gets too old, the company will cancel the account.

At some point during a company’s collection process, it will close or suspend your account. This isn’t always the first step, though. When accounts are between 30 and 60 days overdue, for example, some companies won’t want to alienate customers who may simply have overlooked a bill. Instead, they may send a friendly letter or email, or contact you by phone, to remind you of the bill. At some point, though, your account will be suspended or canceled. If it’s a utility bill, your service may be shut off, and instead of just bringing the account current, you may have to pay the entire amount in full to get service restored. If the debt is for the purchase of a car, repossession is likely if the debt goes unpaid past 60 days. If the debt is a home mortgage, expect the lender to adhere to time limits set forth in your state’s law for foreclosure.

Third-Party Collection Agencies

Collection agencies deal with thousands of delinquent accounts.
Collection agencies deal with thousands of delinquent accounts.

At some point, generally when the account is 90-120 days in arrears, the company charges the debt as a loss on its books and turns it over to an outside collection agency, which must then alert you that it’s been engaged by your creditor to collect the debt. The agency continues to try to collect the debt, and some are paid a flat fee for their collections. Most are paid a commission of between 15 and 40 percent. Third-party agencies are bound by the Fair Debt Collection Practices Act, which prohibits them from harassing debtors or misrepresenting themselves or the debt. However, they can – and do – threaten to alert the credit reporting agencies Equifax, Experian and TransUnion about the debt, and they can follow through on those threats, which can damage your credit rating.

Dealing with Collection Agencies

Once your creditor turns to an agency, you must deal with it. If you dispute the debt, do so in writing, by certified mail. Whatever agreements you reach, do not take action on them until you receive a written, signed copy of the agreement. Take good notes of phone conversations and never authorize any payments online or over the phone. Issue the agency a paper check or a money order for each and every payment. Before making a blanket payment that will retire a debt, secure a written statement from the agency confirming that the payment settles the debt in full, naming the original creditor and the account number. Depending on many factors, including the size and nature of the debt, if you do not reach a settlement with the agency, your account may be turned over to an attorney for legal action.

Credit Bureaus

Credit bureaus do not collect debt, but they maintain databases of the payment histories of hundreds of millions of consumers worldwide, and issue each consumer in their files a numerical credit score based on the original Fair, Isaac Corp., or FICO, credit scoring model. Creditors and third-party agencies alike can make adverse reports to the credit bureaus based on a consumer’s late payments, and these reports can have a significant impact on the consumer’s FICO score and ability to qualify for credit to secure car or home loans. The FICO score is also used by some insurance companies as a factor in determining insurability, and some employers include applicants’ FICO scores when making hiring decisions. Thus, unpaid debt can have significant consequences on your life.