Debt Sold to a Collection Agency: What Happens Next?

When you first take on debt, you get it from a creditor like a bank or lender, and that's who you repay. However, your debt may not always stay with the original creditor.

Some debts are sold to new servicers, like another bank. This often happens behind the scenes and shouldn't impact your repayment, other than maybe changing where the check goes. If your debt is delinquent, however, it could be sold to a debt collection agency instead—and then the calls start.

Hearing from a collector can feel stressful or a little unsettling—especially if you weren’t expecting it. However, debt collectors must follow a strict code of conduct, and you have legal rights to help you through the process. Let's explore why debt is sold and what to do if your debt's been sold to a collection agency.

Collections Debt vs. Debt Sold to Another Servicer

Selling debt to a collection agency isn’t the same as debt sold to another servicer. 

Let’s say you have a mortgage or student loan, and you’ve never missed a payment. Your lender may still sell those loans to other servicers or financial institutions to manage. However, you don't have to do much; you’ll receive a notification and begin making your payment to the new owner of the debt.  

Often, original creditors will sell part of a debt portfolio to raise capital or because the lender has reviewed its books and wants to reduce exposure to potential defaults. A debt could be sold for many business-related reasons, and none of them is a reflection on you as a borrower.

Why Unpaid Debt Gets Sold

When a debt goes unpaid, the original creditor will typically put it up for sale in an effort to recover some of the money. If you’ve ever received a call from a debt collector who doesn’t work for your creditor, it's likely because the debt was sold to a collection agency. 

Here’s how the sale process works:

• Creditors collect unpaid debts and bundle similar types together. In other words, credit card debt will be in one bundle, auto debt in another, and so on.

• The debt portfolio is put up for sale, often through a bidding process.

• Once it’s been purchased, the debt buyer owns the debt and has the legal right to collect it.

If you’ve ever wondered why anyone would buy bad debt, the answer is money. Buyers of debt pay just pennies on the dollar, so any money they manage to collect is largely profit. Let’s say a debt buyer pays $0.09 on the dollar for debt that’s less than six months old, also called fresh debt. If you owe $1,000, the buyer will pay $90. If they can get you to repay the entire amount, that’s a pretty impressive profit. 

What Happens After Debt Is Sold to a Collection Agency

You can expect several things to happen once your debt has been sold:

• Typically, you’ll be notified about the sale and instructed to work directly with the collection agency.

• You can expect collection efforts to kick into high gear as the collection agency seeks to profit from the debt it purchased. Collection efforts may involve phone calls, letters, emails, and other methods to reach you.

• The debt may appear on your credit report as a collection account, which can negatively impact your credit score.

• You may be able to negotiate with the collection agency for a lump-sum settlement, a payment plan you can afford, or even debt forgiveness (although debt forgiveness tends to be rare).

• If the debt remains unpaid and the statute of limitations is still in effect, the collection agency may pursue legal action to collect. The statute of limitations in most states is typically three to six years, although it may be longer in some jurisdictions.

What Debt Collectors Can and Can't Do

Your rights as a consumer are protected by the Fair Debt Collection Practices Act (FDCPA). The FDCPA is meant to protect you from abusive or deceptive practices. It applies to debt collection agencies, but not original creditors. 

In a nutshell, here’s a breakdown of what debt collectors can (and can’t) do, according to the FDCPA.

A debt collector may:

• Contact you. While a debt collector may contact you to discuss the debt, they must identify themselves as a debt collector.

• Request payment. A debt collector will ask you to pay the debt and may discuss payment arrangements.

• Communicate with others. If a debt collector can’t find contact information for you, they are allowed to contact others who may know you. They can ask for your contact information, but they can’t speak to that person about your debt.

• File a lawsuit. If a debt collector believes they won’t receive payment, they could take legal action.

A debt collector may not:

• Harass you. A debt collector can’t use abusive language, attempt to intimidate you, or make threats of any kind.

• Lie to you. A debt collector can’t lie about the debt, including how much you owe or what will happen to you if you don’t pay.

• Contact you when it’s inconvenient. A debt collector can’t call you before 8 a.m. or 9 p.m. unless you give them permission to do so.

• Call you at work. If you tell a debt collector that you can't receive calls at your place of employment, they can’t call you there. 

• Threaten arrest. A debt collector can’t tell you you’re going to be arrested or imprisoned.

Your Rights When It Comes to Debt Collection

You have legal protections as well as rights. For example:

• Notice. Within five days of first contact with you, a debt collector must give you information about the debt, including the amount you owe, the name of the original creditor, and your rights as a consumer. 

• Proof. You have the right to request debt verification. In other words, the debt collector must provide you with documentation that verifies the debt is yours and how much you owe. Make it a point to check the debt's date to ensure the statute of limitations has not passed.

• Control over contact. You have the right to request in writing that the debt collector stop contacting you. Once they’ve received your letter, they must stop communication (with limited exceptions). To ensure the letter is received, send your request via certified mail with a return receipt. Remember that stopping communication doesn’t make the debt go away. The collection company could still take you to court or report the collection to the credit bureaus.

• Somewhere you can turn. If you believe a debt collector has violated the FDCPA, you have the right to report them to the Consumer Financial Bureau (CFPB), Federal Trade Commission (FTC), and/or your State Attorney General. 

Being involved in debt collection is never fun, but you do have protections in place. If you need help with overwhelming debt, you don’t have to handle it on your own. Experienced Debt Experts can help you figure out where you stand and work with you to develop a plan to address your debt.