Many people do not realize the difference between a creditor and a collection agency. Because of this, misconceptions about the rules of how each can collect on a debt exist. To gain an understanding of these differences, it is important to first identify what both are and how they collect on outstanding debts.

What is a Creditor?

A creditor is the original entity that extended credit, service or a loan. This can refer to credit card companies, department stores, banks or any number of similar companies. Creditors are not generally the same as a collection agency, although many have their own internal collection departments.

How Do Creditors Collect on Debts?

First, creditors rely on consumers to responsibly pay their debts on time according to whatever schedule was originally agreed upon. This is generally done by a statement being sent to a consumer on a regular basis, which a consumer is then expected to pay on or before a designated due date. However, when this does not happen, creditors will usually charge late fees to the account, send a series of reminders and make phone calls in an attempt to collect on debts when accounts become delinquent. As time progresses, if an account remains unpaid, creditors will generally stop the consumer from using the account any further, send the account to their collections department or even hire an outside collection agency to work on collecting the bad debt.

How long does it generally take before an account is given to a Collection Agency?

This can depend, as each company has its own methods of dealing with bad debt. Usually, the process can be anywhere from three to six months. Communicating with the creditor and making an effort to make minimum payments can delay or completely stop the account from being assigned to a third-party collection agency. Once a debt goes to a collection agency, most consumers have lost any chance of negotiating with the original creditor.

How do Collection Agencies work?

Most collection agencies buy bad debt from creditors and attempt to collect on those debts for less than their original amount. Sometimes agencies will even work on a commission basis and creditors will pay them a percentage on what they are able to collect. It is not unusual for collection agencies to assign an attorney to attempt to collect on bad debt or resell a debt to another agency if they are unable to collect on it.

How far can Collection Agencies go in collecting on a bad debt?

The Fair Debt Collection Practices Act (FDCPA) regulates what collection agencies can and cannot do. Consumers should be aware, however, that the FDCPA only applies to third-party collection agencies and not to the original creditor or to its internal collections department. The FDCPA protects consumers by not allowing collection agencies to call a person’s home after nine at night or before eight in the morning. Collection agencies are not allowed to threaten a person, they are not allowed to call a person’s job if they are told that an employer does not allow collection calls, and they are not allowed to call personal friends and family members to speak to them about a person’s private finances.

Resolving Debt

Paying debts on time is always the best way to protect one’s credit rating while avoiding negative contact with creditors and collection agencies. However, when one falls behind in repaying a loan, credit card debt or other debts, a cash advance or a loan till payday may help. If bad debt continues to be a problem and accounts are referred to a collection agency, understanding how such agencies operate can be very important in learning how to communicate with them to resolve a debt.

Good news for debtors: You really do have options

Borrowing money doesn’t mean consumers have to file bankruptcy when they get into trouble. Today’s market is changing. It’s not as easy as it once was to manage due to the recession, unemployment rates, job cut-backs, and overall market problems. The good news, however, is that hard financial times have opened the doors to more options for people in trouble. Many people who formerly would have automatically looked to bankruptcy have some options now. Here are a few that may help.

Refinance a home

For consumers who are having a hard time making ends meet, now is a great time to look into refinancing. Interest rates are at all-time lows now and that can save any family a considerable amount of money on a monthly basis. For consumers who have steady income and some equity in a home, refinancing can be a good way to reduce monthly expenses. In an Economy.com article, Martin Battleman said, “It’s the perfect time to talk to mortgage companies…in particular if you are a good paying customer. They don’t want to lose you and with interest rates so low, it could save anyone from financial disaster.”

Negotiate with creditors

The market downturn wasn’t good news for anyone—and that includes lendings. It’s always possible to at least call a lender and try to negotiate. If you have a good payment history, you’ll have extra negotiating power with the lender. Don’t wait to call until you’ve missed. Being proactive is a key to overcoming financial problems. As Battleman said, “The worst thing a customer can do is wait and lag behind in payments. Too many people freeze when they can’t pay their bills instead of act quickly. Talk to your lending company as soon as you know there might be a potential problem.”

Consolidate credit-card debt

Borrowing money can become overwhelming and the number of credit cards a person has can get out of control. For anyone with a large number of credit cards, consolidation may be a helpful option. Sometimes getting rid of cards isn’t necessarily the best, but transferring balances to lower-interest cards can reduce monthly payment amounts. Consumers can also strategically focus on paying off higher interest cards. Doing so can cut down on large interest payments and help stave off bankruptcy.

Renegotiate vehicle loans

Another good option is to talk to car lenders. A car payment is normally a large expense in a household. Sometimes you can renegotiate the payment amount on your current car loan. If not, you may be able to refinance with a new lender at a more favorable interest. Either way, playing hardball with car lenders can work in today’s market.

The new view on bankruptcy

Borrowing money has put many people in difficult financial positions. A huge number are looking to bankruptcy to help them out of their binds, but there are other options. In Battleman’s words, “Bankruptcy is the only solution for some people—yes. But not all people. Some can be proactive and find ways to avoid something that may hamper them for ten years.”

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Creating a debt management plan helps consumers pay debt, reestablish credit and begin to regain control over their finances. However, many avoid doing so because of misconceptions about the way that debt management plans work. In some cases, people have been purposely misled by debt counselors to believe myths about debt consolidation. For others, insecurities about being unable to pay debt obligations have convinced them that they are precluded from creating a debt management plan that works.

Debt management plans explained

A debt management plan (DMP) is created with a trained counselor who is willing and able to help consumers pay debt and rebuild credit profiles. In order to do so, a consumer agrees to regularly deposit money into an account and allow the counselor to pay debt that it owed from that money. An added bonus of a DMP is that many debt collectors are inclined to lower or eliminate fees that have accrued on the account due to previous non-payments. When a counselor is allowed to pay debt on behalf of the consumer, most creditors realize the opportunity to collect what is owed to them and are willing to cooperate in making it affordable to do so.

Dispelling myths about debt management plans

While many creditors view a debt management plan positively, it is never guaranteed that they will do so. It should be clearly understood that the creditor is under no obligation or expectation of reducing amounts owed, but such is done as a courtesy at the creditor’s discretion. Therefore, existing fees should always be factored into the overall budget used to pay debt.

People are also sometimes reticent to participate in a DMP because they have heard rumors that doing so will hurt their credit. For the most part, this is false. In fact, more often than not, the opposite is true. Many creditors view DMPs as a person being serious about regaining control of their finances and repairing their credit. While it is up to individual creditors as to whether or not they will grant future credit, many are inclined to do so as they see a person taking serious strides to pay debt. Also, creating a debt management plan does not adversely affect one’s FICO score at all and, in fact, the Fair Isaac Company does not give reference to debt counseling on one’s credit report.

A Word to the Wise on Debt Counseling

Many have also been afraid of creating a debt management plan because they have been in contact with unscrupulous debt counselors. Unfortunately, charlatans exist in every industry and financial planning is not exempt. In some cases, people have been told that the best way to repair their credit is to pay an exorbitant fee to a counselor, while ignoring past debts. In these scenarios, people have trusted supposed experts to do the right thing and, instead, their credit has been further ruined as their hard-earned money has been pocketed, while their debts have sometimes worsened.

Rebuild credit and a new financial future with a debt management plan

Overall, a debt management plan is a great way to pay debt while reestablishing one’s credit. Often, perks such as lower fees on existing debt and new credit is extended, though not guaranteed. As people become more educated on options available to them to pay debt and rebuild credit, the allure of a debt management plan becomes a perfectly reasonable option and one that can realistically give people control over their financial futures, once again.