The purpose of a collection agency is to collect unpaid debt. If you owe a debt to a company, you run the risk of having a debt collector enter into your life. Making payments on a past due bill is a good way of reducing how much you owe, but it may not always keep you out of collections.
If you owe money to a company and default on the debt, that company has the right to turn the debt over to a collection agency, even if you are making payments. A creditor is not obligated to accept payment arrangements on a past due debt: It does so at its own discretion. The company can hire a collection agency to collect the debt on its behalf, or sell the debt to the collection agency outright.
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If you're making payments, the creditor is less likely to place the debt with a collection agency because they cost the creditor money. When a creditor hires a collection agency, the agency receives a percentage of the money collected, usually only pennies on the dollar for the debt. It's generally more lucrative for the creditor to accept payments directly from you than to involve a third party. If the creditor determines that trying to collect from you is no longer cost effective, however, it may then consider the use of a collection agency.
A debt placed with a collection agency can affect you in a number of ways. Collectors have the right to place collection accounts on your credit report. These accounts are considered derogatory and may negatively impact your credit rating. Collection accounts remain on a credit report for up to seven years. The collector may also sue you, depending upon how much you owe. A judgment against you may allow the collector to garnish a portion of your wages or seize property or money from your bank accounts. Judgments also stay on your report for up to seven years.
Statue of Limitations
Each state has a statute of limitation on debt. This statute limits how long you are legally responsible for that bill. Once the time period under the statute passes, the debt has expired and you no longer have a legal obligation to pay it. If the debt is still within the statutory period, the creditor or collector can still legally pursue you for it. Check with your state's attorney general to find out what the statute of limitation on debt is in your particular state.
Although creditors are not obligated to accept payment arrangements on delinquent debt, many of them do. If you owe a debt to a company and would like to pay it off, get the payment agreement in writing. In addition to detailing how much you owe and payment dates for the debt, the agreement should also include verbiage that the creditor will not turn the debt over to a collection agency as long as you honor the terms of the agreed-upon payment arrangement. If you have it writing and the creditor turns the debt over to a collector anyway, you may have a legal cause of action against the creditor. If so, speak with a consumer lawyer to learn what your rights are.