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Third party collection is a form of debt collection which is performed by a third party, a person or entity who was not part of the initial transaction or contract. Creditors may turn to third parties when their own collection efforts are not effective. The activities of third party debt collectors are limited by law in many regions of the world and people who are in debt would be well advised to get informed about the specific laws in their regions, as debt collectors sometimes attempt to skirt the law when they make efforts to collect on a debt.
Many large companies have their own collections departments. Initially, these departments will attempt to collect the debt internally for the company. If the debtor does not respond, the company can hire a collections agency which specializes in third party collection. Smaller companies may turn immediately to an agency because they cannot afford to maintain a collections department.
Classically, third party collection starts with a series of letters, for which the creditor pays a flat fee. The letters encourage the debtor to pay the debt in full to the creditor. If there is no response, the creditor assigns the account to the agency and the agency can take more aggressive means to collect on the debt. If the debt is collected, the agency retains a commission and sends the rest to the creditor. Creditors want to avoid third party collection because it means that they cannot collect the debt in full, thanks to the commission which must be paid.
Collection attempts can include letters and phone calls to the debtor. Depending on the jurisdiction, the agency may be able to file suit on behalf of the creditor and to take other steps. If someone has cosigned on the debt or assumed responsibility for a debtors outstanding debts, the third party collection can include attempts to collect debt from this person as well as the original debtor. The collections agency usually cannot, however, confiscate assets belonging to the debtor unless a suit has been filed and judged in favor of the collections agency.
It is important to be aware that when a third party collection occurs, the creditor still owns the original debt. Creditors can also opt to sell their debts to companies which buy debt and collect on it. When the debt is purchased, the new buyer becomes the creditor. Companies which buy debt can be quite aggressive and people who owe money would be well advised to try and work out a payment plan or settlement before the original creditor sells the debt.
@ElizaBennett - Everything you said is true but I think you left out the most important part of debt collection law - if you ask them in writing to stop contacting you, they have to comply. It doesn't mean that you don't owe the money, just that they can't keep calling you for it. You can also ask them not to call you at work. We went through this with an employee at my old job who was out on maternity leave. Creditors would call looking for her and we kept referring them to HR, but the calls kept coming until we started sending them written notices. (It was a pain, but worthwhile for the receptionist.)
And remember that debts disappear
off your credit report seven years after the last activity. If the debt is, say, six and a half years old, your credit score might actually be better served by ducking their calls and waiting it out rather than by making a payment, which moves that bad debt right to the top again. They can try to collect debts that old but they just don't have much of a leg to stand on.
People should know their rights under the Fair Debt Collection Practices Act, whether they have any outstanding debts or not - creditors and third party collectors will often call neighbors, friends, family, etc. For one thing, they are not allowed to harass your or your acquaintances (they are only allowed to call your friends, etc. to try to find out where you are).
Other things that they are not allowed to do include calling you in the middle of the night, calling your phone over and over, and publicly embarrassing you. (They can't publish your name as a debtor or send you postcards with debt information on them.)
Anyone who has been hounded about a bad debt can get more information about it online.
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