Difference Between Assigning & Selling a Debt to a Collection Agency

When a customer fails to pay a debt, creditors often assign or sell the debt to a collection agency. In either case, federal and state laws protect consumers against abusive and deceptive practices.

Collection Agencies

Many companies do not have the resources to spend a lot of time pursuing debtors for what they owe. Collection agencies specialize in collecting debts and use various methods to track down debtors to convince them to settle or pay their bills. Typical collection agency methods include sending letters to the debtor and calling them at home or work.

Contingency or Flat-Fee Agencies

Some collection agencies operate on a contingency or even a flat-fee basis. Creditors assign their bad debt accounts to the agency that, in turn, collects on behalf of the creditor. Contingency collection agencies don't accept an up-front fee from the creditor, but instead keep a percentage of what money it does collect from the debtor. Some collection agencies also accept a flat fee from the creditor, which it gets to keep regardless of whether it succeeds in getting a debtor to pay her bill.

Debt Buyers

Some creditors prefer to wash their hands of non-paying clients and just sell a defaulted account outright at a tiny fraction of its value. There are many companies that buy debt; they are often known as "debt buyers" or "debt factoring companies." These companies often operate as collection agencies and can pursue debtors just as a contingency collection agency would. However, since debt buyers actually own the debt, they may be more willing to agree to a significantly discounted settlement with a cash-strapped debtor.

Federal and State Laws

Federal and state debt collection practices law governs the way all third-party debt collectors can attempt to collect debt. The Fair Debt Collection Practices Act, for example, prevents debt collectors from harassing or abusing debtors. The Fair and Accurate Credit Transactions Act restricts the way debts, even debts purchased by a debt buyer, are reported on consumer credit reports. For the purposes of credit reporting, negative information on a debt purchased by a collection agency can only be reported from the time of default with the original creditor: Debt buyers cannot report the debt as "new" from the time of its purchase.