Debt collectors have always received a bad rap, sometimes for good reason. But not all debt collectors are the same.
Many creditors and lenders operate their own debt collection department. Because credit providers are in the business to lend money, they tend to understand the value of maintaining a positive brand image. The last thing any bank or major creditor wants is a reputation for ruthlessness and abusive practices.
This is why most in-house debt collection try to maintain a very professional and often adaptable approach to collecting on debt. They try to arrange payment schedules and make sure to work within the letter and spirit of the Federal Debt Collection Practices Act, as well as any other applicable state laws.
But when creditors or lenders don’t have in-house debt collection teams (or their debt collection fails), they will often turn to outside collectors.
Strictly speaking, a collection agency works for the creditor. They may get a flat fee for their work or a percentage of any amounts collected, or a combination of the two. The collection agency, however, doesn’t own the rights to the debt. They’re just working for the creditor to collect on the debt. If a collection agency fails to collect on a debt, the only loss they usually suffer is the time spent on the case.
A third type of debt collector faced by many consumers is the debt buyer. To many consumers, they’re the worst type.
Debt buyers purchase the rights to a debt from the creditor or lender, usually for 3% to 16% of the face value of the debt. Because they are not interested in lending money as a business or establishing a long-term positive brand image among consumers, debt buyers often employ the most aggressive debt collection tactics.
Another motivation for their aggressive approach is that unlike collection agencies, debt buyers have money on the line with each debt obligation they pursue. If they fail to collect on a debt, those debt buyers are out the money they spent to own the debt.
Although the concept of debt buying has been around for a long time, the buying of and active collection on debt really took off as a business with the S&L crisis of the 1980s. The Resolution Trust Company was tasked with liquidating the assets of failed Savings & Loan companies, and one of the biggest types of asset held by those S&Ls were unpaid debt obligations.
The debt buying industry has subsequently become the secondary market for a lot of difficult-to-collect consumer debts. It is literally now big business, as many banks, creditors and other lending institutions have standing “forward flow agreements” with debt buyers to handle all “charge off” accounts.
The truth is that debt buyers do serve a beneficial role in the financial industry and national economy. By relieving businesses and creditors from the burden of handling debts they’re unable to collect on, debt buyers allow these institutions to move forward. Yes, these creditors only get a small fraction of the face value of those debts — but it’s better than nothing.
To consumers and businesses on the hook for those debts, however, debt buyers are not so beneficial. That’s why it’s important for all consumers to understand their rights when dealing with debt collectors, especially debt buyers.
As you embark on the road to repairing your credit, you will probably encounter quite a few collection agencies and debt buyers. Don’t let them overwhelm you. Remember that you have rights as a consumer — and they must follow the law.