02 Oct 2020

How debt collection agencies work

If you are being contacted by debt collectors, it is important to understand what powers these companies have and what your rights are. These companies are specialists when it comes to chasing debt and you may feel under pressure to agree to a repayment plan, but you should never agree to pay anything unless you are completely satisfied that the amount they claim you owe them is correct and enforceable.

What does a debt collection agency do?

When your account falls into arrears, or you are issued a default notice, it is likely that you will begin hearing from debt collectors. Debt collectors are specialist companies who are appointed by banks and other lenders to chase borrowers and collect debts.

Your lender will usually appoint a debt collector after their own collections department has not been able to agree a repayment plan with you. Debt collection companies operate large call centres which are dedicated to contacting customers and setting up payment plans. They are often able to offer flexible repayment terms and accept very small monthly or weekly repayments, particularly if you do not have much spare income after paying your essential bills.

Debt collectors will take the payments from you and pass them onto your lender. They will not deduct any fees or charges from the payments you make to them, and you will see the full payment on your next statement. Debt collection companies should know your personal and account details which will have been passed on from your lender. They will use these to confirm your identity.

If you are at all concerned about whether the company contacting you is genuine, you should hang up and call them back on the number advertised online using a different phone line or, if possible, a mobile. If you are still unsure, contact your lender to confirm that the company is acting on their behalf.

Debt collection companies can contact you by phone, letter or email, although you can ask that you are contacted solely by post. They cannot contact you at unreasonable hours such as early in the morning or late at night. Although a debt collector can visit your home and request payment, they are not bailiffs and are not allowed to enter your property or take your stuff.

Common collection tactics include multiple and frequent contact methods and allusion to legal action, such as taking your property or obtaining a court order. Though this may at times feel threatening or upsetting, debt collectors use templates and automated systems to make contact. It is important to remember that it is not personal.

You may feel a debt collector is overstepping the mark when chasing a debt. If you feel like this, you are probably not wrong. Debt collectors are subject to limitations, but if you feel harassed, you can report them to the Financial Ombudsman. You may wish to read more about the rights debt collectors here.

If these companies are not successful and a creditor is still not receiving the repayments they are after, it is common for them to sell the debt on to a debt buyer. Debt buying companies are very similar to debt collectors, and in some instances the company who has bought your debt may even be the same company that was appointed by your bank as a debt collector.

To further confuse matters, it could even be that your debt has been bought by a debt buyer, and that company has now appointed a debt collector to contact you. Establishing the difference between a debt buyer and a debt collector is important and will prepare you for your future dealings with that company. If you are contacted by any company other than your lender you should always contact the person on the phone whether their company owns the debt or otherwise who they are collecting the debt for.

How can a company buy my debt?

It may be difficult to think of a debt as something which can be bought or sold, but this is a ‘good’ just like any other and can be bought. It may help to think of debts as a ‘promise to pay’, just like an old bank note, which must be repaid to whoever owns the ‘promise’ or debt.

Unpaid debts are usually purchased in bulk from creditors. The benefit of this for the creditor is that it ‘cleans up’ their accounts by removing the really overdue accounts which it will take years to collect. They can then focus on their speciality, which is giving credit rather than chasing debt.

In return, the buyer can collect the full outstanding balance of the debt meaning they make an easy profit. They do not need any specialist teams or complex processes to do this, meaning their whole operation is very low cost and they can make big profits with little effort.

When a debt buyer purchases a debt, both the original creditor and new owner of the debt must write to you and tell you that your account has been sold. This is called a ‘notice of assignment’. The notice of assignment will confirm the date of purchase, balance at the date of sale and the name and details of the debt buyer. This, however, will not tell you how much your account was sold for or what repayment plan you have in place.

How do debt collection agencies work

Debt buyers purchase debts from other companies by paying that company a small percentage of the outstanding balance. The balance is then transferred to the buyer who is the legal owner of the debt and now assumes all of the rights and responsibilities of the lender. The original creditor no longer owns the debt and cannot chase you for any payment.

Contrary to popular myth, there does not need to be any agreement between you and the debt buyer in order for them to legally own your account. The debt buyer takes the position of lender in your original agreement and must abide by the same terms you agreed to with the original creditor.

Importantly, your legal rights do not change when your debt has been sold. But nor do your responsibilities. You will need to keep up with any agreed repayments or you will be at risk of enforcement action and possibly even a court judgement.

What should I do if I am contacted by a debt collector?

It can be alarming receiving contact from a debt collector, particularly because their letters are designed to shock.

Before you make any payment to a debt collector or debt buyer, you should check the amount they are claiming is properly due. Debt buyers and collectors buy debt in bulk and can make mistakes, it is important to confirm they own the debt they are claiming and the amount they say is due.

Corresponding with a debt collector or buyer is not the same as admitting liability for the debt. You have a right to ask for all of the proof you need to be satisfied that you are paying the right company. You can also ask for a copy of the credit agreement you signed and other documents as evidence that the debt is enforceable.

If you have been contacted in error and are not liable for the debt claimed, contact the company in writing and tell them. However, you should make sure you are certain as they will be able to prove you wrong if not. Once you’ve contacted the company, you should keep a copy of the letter for your records. You can then refer the agency to the Trading Standards if contact persists.

It is important not to ignore contact from either debt collectors or debt buyers. While it is tempting to stick your head in the sand, the problem will only get worse and ignoring these companies can quickly lead to court action against you.

Galahad & Co can help you when you receive contact from a debt collector. We specialise in challenging these companies and defending your rights.