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The Business of Debt Collection

Debt Collectors

Debt collectors are not original creditors: they don't make loans or issue credit cards, they just collect debts. In some cases they work on a fee or contingency basis. In other cases they purchase bad debt from a credit card company for pennies on the dollar and then attempt to collect the debt as an independent 3rd party.9

For example, say you have a $10,000 balance on a credit card. You stop making payments and after six months the credit card company writes the account off as bad debt. At this point the original creditor will either assign or sell your bad debt.

If they assign the debt, then the original creditor still owns the account, but they contract with an outside firm to collect on it. Typically assignee debt collectors are paid on a percentage basis of what they can recover.

If your debt is sold, a collection company actually buys your bad debt from the original creditor for somewhere around ten cents on the dollar. The collection company now owns the debt and the original creditor has given up all rights, title, and interest. This scenario is not only the most common, but is also better for you.


Allow me to answer that question with a question. If you had a credit card through XYZ Bank and they sold it to ABC Collection Company, do you have an agreement with ABC Collection Company? No, you don't. You had an agreement with XYZ bank. For now, suffice to say it is a legal distinction that, when it comes to debt collection laws, can make a big difference, as you will soon learn.

Now the new owner, ABC Collection Company, has the right to collect on your bad debt. In fact, many will add on penalties and interest in hopes of getting even more money, and short of that, setting a higher starting point for haggling with scared, intimidated, and uninformed consumers.

When the original creditor first offers your account for sale, debt collectors are willing to pay the most for it. In general, your credit card account might fetch 8 — 12% of its value the first time it is sold. The debt collector who purchases your account may work it hard for three to six months, but if they aren't successful with their debt collection efforts they will likely cut their losses and sell your account to another debt collector—this time for maybe 5 — 8%.

The pattern continues and, years later, a debt collector might pay as little as .25% for your account (especially if the statute of limitations on collecting that debt is near). Over time your account could be bought and sold several times.

Because they have invested the most in your account, the initial debt-buyer of your account will work the hardest to collect on it. They have the most to lose if they fail. After all, if a debt collector buys a $10,000 debt for $1,000 and collects the full amount, they have just made a 1,000% return on their investment!

As you will learn in the next section, what debt collectors do and what they are allowed to do under Federal law are two entirely different things. Unfortunately, violating your rights is simply good business and extremely effective. Not knowing your rights is like swimming in murky waters with sharks!

Whether your debt is sold or assigned, the debt collector is governed by the Fair Debt Collections Practices Act (FDCPA), a set of federal rules regulating the debt collection industry. In short, the FDCPA is like a bill of consumer rights designed to protect you from abuse, intimidation and fraud in the debt collection industry. This is where knowing debt collection laws comes in handy.

For example, the FDCPA requires any debt collector to send what is called a dunning letter within five days of contacting you. Usually the first contact is the dunning letter, but, if a debt collector calls, they have five days to send a dunning letter (they can also make the same disclosures verbally by phone). While the language contained in dunning letters may vary, in basic terms a dunning letter says:

"We have purchased your debt. You have 30 (thirty) days to dispute the debt or it will be considered valid."

You then have thirty days to respond to the letter. If you do not respond within the specified time frame you lose your right to dispute the debt and by default are obligated to pay the debt.

Let me repeat that:

If you do not respond within the specified time frame you lose your right to dispute the debt and by default are obligated to pay the debt.

Sounds like lawsuit language doesn't it? That's because it is.

Here's what a dunning letter might look like:

ACME Debt Collection
123 Anywhere Lane
Debtor, IL 12345

Date: June 1, 2010
Name: John Doe
Account Number: 1234567

Your account has been reported past due and has been placed with ACME Debt Collection for immediate collection. It is important to contact us as soon as possible. If you are remitting payment, please include your account number on your check or money order. All contacts and payments should be made through this office to ensure proper posting and credit reporting.

For your convenience, you can make a debit or credit card payment by contacting our billing department at 888-DEBTPAY.

Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume the debt is valid. If you notify this office within 30 days from receiving this notice that you dispute this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request this office in writing within 30 days of receiving this notice, this office will provide you with the name and address of the original creditor, if different from the current creditor.

This communication is from a debt collector. Thitained will be used for that purpose.


Joe Harasser
ACME Debt Collection

Pay special attention to the italicized portion of the sample dunning letter. Once you receive the dunning letter you have 30 days to respond in writing. The FDCPA requires debt collectors, once they have received your dispute letter, to stop collection efforts and not report anything to the credit bureaus unless or until they verify the debt.

Quick note: what if you never received a dunning letter and the 30 days has already passed? You may still be okay—just make sure you send a different validation request (a copy of a 30-plus day verification request is provided in the Resource Library). This letter states that you never received a dunning letter (or verbal equivalent), and requests verification and validation of the debt. This puts you back on the offensive and points out that they are violating the FDCPA by failing to provide a dunning notification in the first place!

Many people stick their heads in the sand when they get a dunning letter and that's exactly what the debt collector hopes you'll do. If you don't respond to a dunning letter within the time limit, your window of opportunity technically closes and you can no longer dispute the debt.

On the other hand, responding causes your rights under the FDCPA to kick in. How should you respond? Just say, in so many words, "I dispute the validity of the debt. Prove it."

If they don't provide the required information, they are prohibited by law to continue collection efforts or report anything to the credit bureaus. It's over (for now). If they do continue, you can sue—or threaten to sue—and use that threat or actual lawsuit as leverage to potentially zero out your account and update your credit report.

Very often debt collectors don't respond to your validation request in an appropriate manner, and instead continue with collection attempts and negative reporting to your credit report (like I said, violating your rights is simply good business.) This is because many debt-buyers simply don't have the information required for proper verification and validation. Often, all they have is your name, account number, and contact information that they bought in bulk from some original creditor or other debt-buyer. We will discuss what constitutes proper validation in later sections along with your options.

After verifying or validating your debt (or immediately if you didn't dispute the debt to begin with), your phone—and possibly your employer's, neighbor's, and family's phones—will start ringing. Official looking letters from what appear to be law firms will start arriving in the mail.

This is where most people start freaking out. Don't.

What you need to realize is that debt collectors are nothing more than sales people (albeit, scary, mean and intimidating ones). They consider you nothing more than a sales lead—you are just a name and a number they want to get money from. Debt collectors buy huge lots of credit card accounts and treat them like ore in a hopper. They need to process a lot of ore to extract the precious metals. To do this they will send out carefully constructed letters (their "marketing materials") that are intended to scare you into paying your debt. Next your phones (and those around you) will blow up trying to hound and guilt you into paying your debt.

However, just like the apple picking analogy above, they are simply shaking the tree and sending in pickers to gather the low-hanging fruit. Whatever remains (the high-hanging fruit) is sold to another debt collector at a huge discount. After all, you have already proven yourself to be difficult and expensive to collect debt from.

If there is only one idea you take away from this program it should be:

Debt collection is a business like any other, and no business is going to spend its limited time and resources chasing the most difficult clients.

Debt collectors calculate what they can pay for thousands of bad debts and still make money on the deal. They know they will collect on a certain percentage of accounts. They know they won't collect on another percentage. They don't know which individual accounts they'll collect on and which they won't. In fact, they don't care—you're just a number, a dollar sign, and a percentage to a debt collector.

Debt collectors try to collect in priority order:

  1. Full repayment immediately
  2. A debt payment plan
  3. A small "good faith" payment
  4. A debt settlement agreement

It makes sense if you think about it. Best-case scenario the debt collector scares you into paying off the whole account. If that doesn't happen, a full payoff spread out over time isn't bad either; after all, the first few payments probably put the debt collector into the black on your account. Subsequent payments are additional gravy. A debt settlement agreement is good for the debt collector as well. Having only paid pennies on the dollar for your account, they can take a pretty low-ball offer and still make money from your account. Finally, a "good faith" payment (or any payment for that matter) ensures you have formally acknowledged you owe the debt, and removes some of the rights you'll learn about in the next section. Making a good faith payment could also potentially reset the Statute of Limitations on the debt. For these and other reasons, I never recommend making a payment to a debt collector unless you plan on settling the account.

Debt collectors will start with the cheapest tactics, like letters, then move on to more expensive tactics, like phone calls and occasionally lawsuits.

And in the process, they will almost always violate your rights under the FDCPA. Let's find out exactly what your rights are by looking at debt collection laws, and how you can start using those rights to your advantage.

9. In general, if you are being contacted within the first year of being in default you are being contacted by a contingency collector to whom the debt has been assigned. Once you get outside that timeframe, your account has generally been bought by a third-party debt-buyer.

> Your Rights Under Federal Law
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