Debt Collector

Updated on March 20, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Debt Collector?

A debt collector is an agency that businesses and lending institutions hire to recover debts that individuals or entities fail to pay back. Companies extend credit to customers, and lenders offer loans to borrowers with a promise of getting it repaid within a specific tenure. However, when they fail to do so, the agency is hired to recover the outstanding dues.

Debt Collector

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The debt collectors work for a fee or commission paid as a percentage of the total amount recovered from debtors. These collectors are also referred to as debt collection agencies. As the collection process might be disturbing for some debtors, there are debt collection laws to protect their dignity.

Key Takeaways

  • A debt collector is a person or agency engaged by a company to recover its debt due to selling goods and services that have exceeded the accepted payment terms.
  • Before proceeding with the debt collection, a collector shall ensure the genuineness of the debt and carry out an independent analysis.
  • Debt collectors are classified into three categories based on the collection practices involved – first-party, third-party, and debt selling individuals or agencies.
  • In the United States, the debt collection entities must comply with the Fair Debt Collection Practices Act (FDCPA), which protects debtors against illegal and unethical debt collection conduct.

Debt Collector Explained

A debt collector is contacted by companies debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more owe to. Businesses do not have time to call or chase every debtor and ask for repayment. This is where the debt collection agencies become active. The companies that extend credit to customers but do not receive the repayment on time have to take collectors’ assistance in recovering the outstanding dues.

For borrowers unable to pay off their debts, their report is sent to the credit bureau. As a result, this delinquency hits the borrowers’ credit history and credit score, making them less trustworthy. In addition, the businesses hire debt collectors within three to six months of default to ensure they recover the outstanding dues at any cost. 

The debt collector can be hired to collect credit card dues, phone or utility bills, loanLoanA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future more payments, etc. Though credit is offered to recipients with an intent to get it back within the scheduled date and time, its conversion into a bad debtBad DebtBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other more leads companies and borrowers to an awkward position. Therefore, the collection agencies help them retrieve the amount on their behalf.

For companies and borrowers, having a collector on board is a wiser option as they cannot devote much time to finding out the debtors and recovering debts. In addition, the collection agenciesCollection AgenciesA collection agency refers to a firm engaged in the recovery of the default loans or dues from the borrowers on behalf of the lenders or creditors. A loan provider or creditor outsources its debt-collection function to such a third party to reduce bad more work for a fee or commission, which is a portion of the fund they collect from defaulters.

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The debt collector companies or agencies that businesses or lending institutions come across can be classified into three categories based on the practices they follow – first-party, third-party, and debt selling.

Debt Collector Types

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The first-party or internal collectors are people who belong to the same organization to which borrowers or customers owe the irrecoverable amount. The company’s internal team handles the recovery of the outstanding dues. On the other hand, a third-party collector is an external agency that companies hire to recover the amounts from debtors. They work for commissions or fees based on the amount recovered from defaulters. While the former remains a bit lenient to their customers to ensure their organization’s reputation is not hampered, the latter is less friendly to the debtors.

The next is a debt selling practice for indirect collection. In this case, when the companies or businesses fail to recover the amount, they decide to write offWrite OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the more such debtor and sell the debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or more to a third-party entity. As a result, the debtor no longer continues to reflect in their accounts. In addition, the responsibility for collecting the debt goes to the companies that buy those debts and become debt buyers. However, the collection approach might not be as lenient as for the rest two as the new company has nothing to do with or is not accountable to those customers.


Let us consider the following example to understand the debt collector jobs and responsibilities well:

XYZ Bank hires Stephens as a debt collector, given his academic background in finance and also the way of approach he prefers. The former gives him a list of defaulters who owe a significant amount of money. He starts with recording the delegated accounts and notes the overdue and outstanding amounts. Then, he develops a plan on how to begin the recovery process. 

Debt Collector

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Stephens connects with the debtors and mutually decides on the deadline for repayment. Meanwhile, he also handles all kinds of queries of the debtors. As a result, a few debtors paid as per his plan, but a few still missed. However, being an educated collector, he did not respond harshly or unethically to the situation. Instead, he hired a debt collector lawyer to continue the further legal action for defaulters.

Debt Collector Laws & Regulations

While some debtors intentionally skip repayment and run away to remain non-traceable to lending authorities or businesses, some genuinely suffer from the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among more, which delays their repayment. Thus, the collectors should act in a strictly professional manner while recovering the debts and not adopt any harmful means to achieve the same.

Different countries have different laws and regulations to protect the dignity of the debtors. For example, in the United States, the Fair Debt Collection Practices Act (FDCPA) limits the collectors’ actions while recovering the outstanding dues. Thus, they must comply with the same when contacting the debtors and acting professionally.

Similarly, in Australia, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) put forth the Commonwealth laws to keep debtors protected against any illegal and unethical debt collection conduct.

Frequently Asked Questions (FAQs)

What is a debt collector?

A debt collector is an individual or agency that businesses hire to make sure customers repay the outstanding dues for their debt recovery. When a company fails to recover the dues, it hires external agents to do the same on its behalf. The collection agencies work for the clients for a fee or commission, usually a percentage of the amount they collect/recover from debtors.

How to negotiate with debt collectors?

Debtors can negotiate with the collectors. The latter is always ready to cooperate as long as they know the former will repay. The debtors can talk to them and ask for options that would reduce their burden for them. For example, they might agree to partial payment or have another settlement plan to make it easier for people to repay the dues.

Can debt collectors take you to court?

Yes, they can take a defaulter to court if they miss repaying despite repeated reminders and negotiations. But, in short, legal action is the last thing they do to ensure debtors pay off the outstanding dues.

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