What do Debt Collection Agencies actually do?

4 Mins read

If you want to get back bad debt and are worried that the debtor is not paying it, then this blog can help you. There are specialized debt collection agencies that are experts in such cases, and they can help you collect your bad debt. But before you can contact these debt collection agencies, you need to understand how they function, and if they will be the right option.

With that said, let’s learn all about debt collection agencies and how they can help you get your money back.

How Does Debt Collection Work?

Debt collectors are private agents working for various debt collection agencies. Some of them are ex-government employees who have worked in the IRS, and others are independent contractors. The purpose of these debt collectors is to get back a bad debt.

Bad debt is any debt that has not been paid, and six more months have passed. Such debt I often referred to debt collection agencies so that they can extract the amount and get their cut. The average cut of the debt collection agency can be between 30% and 50%.

Debt collectors can collect all types of bad debt, including credit cards, medical, automobile loans, personal loans, utility bill payments, business loans, and even student loans.

When the actual creditor is not able to collect a debt, he/she refers the case to a debt collection agency. Sometimes corporations that don’t want to use their own resources to collect debt also use debt collection agencies to do the same fo them.

Debt collectors can collect as low as $200. However, most debt collection agencies have a minimum amount of $10,000 or more to be collected before they will use their resources.

Dos and Don’ts of Debt Collection Agencies


  1. Debt collection agencies can only extract debt while staying within limits prescribed by law
  2. They can only use legal resources such as phone calls and emails to collect the debt
  3. They can send reminders every week to collect the debt
  4. They can use legal methods to find assets of the debtor to form a case
  5. They can file a case against the debtor in the local court


  1. They can’t invade someone’s life or find out their personal details
  2. They can’t approach them directly without special consent from the local police authorities.
  3. They can’t file false allegations in court
  4. They can’t check debtors bank accounts without special permission from the court
  5. They can’t bully or threaten the debtors of consequences because that’s against the law

Debt Collection Agencies Can Buy Debts

There are debt collection agencies that can buy debt directly from the creditors. They buy bad debts so that they can profit when these debts are recovered. Creditors sell these debts at a throwaway price because they are not able to collect it.

Debt collection agencies can pay as little as 4 cents for a dollar of debt. So, if the debt is $1000, the debt collection agency will buy it for $40 only. This means more profit for the debt-collection agency once the debt is recovered in full. Even if it is not able to collect the debt in full, it still profits from the deal.

Most creditors package all the bad debts together and sell them to the debt-collection agencies. These packages include bad debts, old debts, and those debts where debtors have decided not to pay. Debt collection agencies will price each package and its contents differently to get a better deal.

Process of Debt Collection

Once a debt collector is assigned a job, he/she will cold call the debtor to let them know that they have to pay their debt. They will also brief them about the time they can pay their debt and also of the consequences that can occur if they don’t pay the debt by that time.

Once the debt period has passed, and the debtors still haven’t paid their debt, then the debt collectors will send them reminders through letters, emails, and phone calls. 

At the same time, they will start investigating the assets of the debtor. This would include everything that the debtor has purchased on their name, including car, house, bank accounts, his job, and total investment. All this gives a fair idea about the debtor and if he can actually pay the debt back. 

If the debtor is able to pay but is not willing to pay, then the debt collectors can hire law consultants to send them a court notice. The court notice is a legal document, and it is binding. It usually states that the debtor will have to respond back or attend a court proceeding. 

After sending a court notice, the debt collectors start preparing a case against the debtors. They collect evidence, statements, and the assets of the debtor to prepare a solid case. 

They also report bad debts to the credit bureaus to encourage the debtors to pay back their debts. If they are not able to pay back, their credit rankings can get serious damage.

If the debt collection agency wins the case, they can collect the debt through the wages of the debtor. If the debtor has assets available, the court can even order thee debt-collection agencies to take those assets in return. However, the value of these assets is assessed by the investigators of the government so that justice is served.

COVID-19 Debt Protection

During the COVID pandemic, all federal laws have barred debt collection agencies from collecting bad debt. 

The Cares Act forbids government, courts, and private investigators to collect the debt until July 25, 2020. These debts include mortgage debt, business loans, federal student loans, and medical loans.


  • Debt collection agencies can collect debt on behalf of the creditor
  • They can buy bad debts and extract them from the debtor to profit
  • Debt collection agencies can also file a case against the debtor if he/she is not able to pay back the debt within a specific time period
  • Debt collectors are paid around 30% to 50% for collecting bad debt for a creditor
  • Debt collectors can also renegotiate a settlement with the debtor if he/she is not able to pay back the debt in full
  • During COVID crisis, companies can’t collect debts including medical, mortgage, student, and business loans

We hope you are now aware of how debt-collection agencies work, what their objectives are, and how they can profit by buying bad debt packages.

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