Collection agencies are responsible for collecting unpaid debts that an original lender has either been unable to collect or has given up on collecting. Often these companies buy unpaid debt from lenders at a wholesale value (usually at a drastically lower price than the dollar amount owed) and attempt to make a profit by collecting the debt in full from the borrower. A consumer should know the laws--especially those concerning reporting to credit bureaus--in order to remain informed if he or she ever faces collection calls.
Time Frame
Collection agencies are required to notify delinquent account holders that in fact a collection agency is attempting to collect a debt. This is normally handled with a certified letter sent to the borrower in question. After this letter is sent out, the borrower has a maximum of 60 days to settle the debt before the information is reported to the bureaus. Most collection agencies will request a response with payment within 30 days (and it is recommended to pay as soon as possible after you've confirmed the debt), but legally you have 60 days to pay or work out an arrangement with the collection agency before the debt is reported to the credit bureaus.
Type of Reporting
Collection agencies report delinquent accounts as "judgments." This is handled with credit bureau-speak--that is, a code is used to classify a dollar amount on a credit report. There are many different codes used to describe delinquent accounts, but common classifications are: account over 120 days past due, charged-off account, and account 360 days past due.
Considerations
While customers have a window of opportunity to settle a debt with a collection agency before it's reported to the three credit bureaus (Equifax, Experian and TransUnion), it's important to understand that any account that has been purchased by a collection agency is most likely already reported as a bad debt on the credit report. Most credit accounts are tracked and reported by lenders, so any account that the lender deemed "uncollectable" will show a negative history of non-payment.
Effects
The effect of a negative report from a collection agency is major. Any judgment listed on a consumer's credit report drops a FICO score considerably. Further, the FCRA (Fair Credit Reporting Act) allows for all judgments (including paid or settled judgments) to remain on a credit report for a period of seven years. Thus, a credit score will be impacted for an extended period of time if a collection agency reports a bad debt.
Warning
It's important to tread carefully when dealing with collection agencies. Some agencies will use scare tactics and intimidation to get borrowers to pay their debts. Informed consumers will verify bad debts, and attempt to rectify an error on a credit report with great haste.
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