If you default on a loan or credit card, your bank can sell the debt in order to recoup its losses. In many cases, the company that buys your debt is also a collection agency, which means that it can begin aggressive collection action against you.
Collections Process
If you fall behind on loan or credit card payments, your bank will contact you about your account. The first contacts will come in letters and phone calls, which will become more frequent as you fall further behind on your debt. If you don't bring your account current, your bank will "charge-off" your account. This means that the bank writes-off your debt as a loss and then turns the account over to a collection agency. The bank isn't under any obligation to tell you that it is selling your debt, though you can usually expect the sale to take place after about 6 months of delinquency and default.
Debt Buyers
Collection agencies come in two main types: Contingency and debt buyers. If your bank wants to continue to own the debt, it can assign the debt to a contingency collection agency. The contingency agency will attempt to collect the debt on behalf of the bank, and keep a percentage of what it does collect. Debt buyers, on the other hand, buy and own the debt, cutting your bank out of the picture. Debt buyers usually pay original creditors a small percentage of the debt's value, and then keep whatever their collectors manage to get from a debtor.
Reselling Your Debt
If the collection agency that buys your debt from the bank isn't successful in collecting from you, it may re-sell it to another debt buyer. In some cases old debts can be re-sold several times. Because no laws exist against re-selling a debt, you may face collection action for years, even decades, after you first defaulted on the debt. Debt buyers don't have to notify you about the re-selling of your debt.
Your Rights
If a collection agency contacts you, the federal Fair Debt Collection Practices Act (FDCPA) gives you the right to demand verification of the debt. You also have the right to tell a debt collector to stop contacting you, though this can cause some collectors to immediately file a lawsuit against you. Pay attention to your state's statute of limitations laws: Some debt buyers specialize in collecting debt that is no longer collectible in court. They do this by tricking you into "resetting" the statute of limitations by agreeing to pay all or part of the debt. Before working with a debt buyer, verify that the debt is yours and that it is still covered under the statute of limitations. If it isn't, send the buyer a "cease and desist" letter, and prepare for the possibility that the debt buyer may re-sell your debt to another collection agency.
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