What Happens When Credit Cards Go to Collection?

The Basics

Cash flow has always been a problem that producers, merchants and consumers resolve by trusting the other party to honor a debt. Where the charge plates of an earlier era allowed a consumer to use credit to buy at a specific retailer or producer with a promise to pay within a certain period of time, "revolving-credit," introduced by general-use "bank" cards, allowed consumers to buy anywhere and make partial payments over time. The practice of buying while paying on old balances led to the largest expansion of consumer buying in history---and to new urgency in collecting debts. Where "in-house" charge accounts were most often (and still are) handled by a "credit department," new charge cards had financial institutions that handled all purchases and collections. As the economy expanded, consumers accumulated "plastic"; applying for new credit cards and moving balances from high-interest cards to lower-interest accounts.

Creditor Collections

Creditors with a direct relationship with the customer (department stores, oil companies) tend to contact delinquent customers and "work things out". Merchant and broker collection departments try to promote payment by adding penalties for late payments and over-limit spending. Credit cards, unlike debts secured by property, are "unsecured" or "open" debts. Creditors are able to negotiate payment schedules and reduced interest rates with cardholders. Creditors may choose to sue debtors but must file within the statute of limitations for the suit to be considered by the court. This period of "life" for a suit varies by state from as little as three years to as much as ten years beginning with the last charge or payment on the account. Since legal costs can be expensive, lawsuits are practical when large amounts are likely to be recovered. Only a court order can force garnishment of wages, savings or liens on property and only the owner of the debt can file suit.

Agents and Resellers

Creditors who cannot collect a credit card debt may choose to "assign" the debt to a collection agency or sell ownership of it to a "secondary" creditor. Creditors typically try to collect for about six months before assigning or selling debts but some will turn debts over sooner. The Fair Credit Reporting Act requires that creditors wait 180 days to report collections to credit bureaus. The actions that debt collectors can use are listed in Title VIII---Debt Collection Practices of the Fair Debt Collection Practices Act (15 USC 1692a). Both types of debt collectors may call or write in attempts to collect debts but must follow rules as to when, where and how to contact debtors, may not make false statements or add unauthorized charges to the debt. Agents charge the creditor for their services; they often arrange payment plans and accept less than the total due. Secondary creditors may settle for what they've paid for the debt. Debtors can demand by letter that collectors cease contact but each time the debt is sold, the new collector can begin contact again.