How Credit Card Debt Collection Works

Learn the players and steps involved in the collection of credit card debt.

If you don’t pay your credit card bills, you’ll probably start getting collection calls and written demands for payment—perhaps from companies that don’t seem to have anything to do with your credit card company. As time goes by, several different companies might contact you and say that they’re collecting the debt or that they now own the debt. You might even get sued by a company whose name you don’t recognize.

The various parties involved in credit card debt collection often include the original creditor, debt collection agencies, debt buyers, and lawyers. Understanding the role of these different players, along with the life cycle of your credit card debt, can be helpful when negotiating a settlement or when dealing with a lawsuit.

The Players

Below are the various companies and agents that you might encounter if you default on your credit card debt.

Original creditor. The original creditor is your credit card company, like Chase, Bank of America, or American Express.

Collection agencies. A collection agency is a company that the creditor hires to collect the debt on the creditor’s behalf. Collection agencies usually get paid with a percentage of the money they recover or a flat fee.

Debt buyers. A debt buyer is different than a collection agency. Debt buyers purchase old debts from original creditors, like banks, credit card companies, and car loan lenders. Unlike a collection agency, which only tries to collect as a service to the creditor, the debt buyer actually owns the debt. Sometimes debt buyers try to collect the debt that they've purchased. Other times, the debt buyer hires another company to collect on their behalf.

Lawyers. Lawyers might become involved in the collections process at any time—even before a lawsuit starts. Some collection law firms are basically collection agencies, with large collection departments. The lawyers at these firms might not actually have any direct involvement with your debt. Once a lawsuit to collect the credit card debt against you begins, though, a lawyer will definitely be involved, though perhaps minimally. (Lawyers trying to collect large volumes of credit card debt from different debtors usually spend little time on each individual suit.)

The Life Cycle of Delinquent Credit Card Debt

The longer your credit card debt goes unpaid, the more it will probably change hands. Here's how the delinquent debt cycle typically works and what will likely happen throughout the process.

Collection Activities

After you fall delinquent on your credit card debt, the original creditor will typically perform collection activities, such as sending letters demanding payment and making collection calls to you. These collection activities will probably continue for about 30 to 90 days. Then—if the creditor isn’t able to collect from you—it will likely send the defaulted credit card debt to a collection agency, which will also send demand letters and call you to try to collect. If one collection agency fails to collect from you, another agency might give it a try.

At any time—even years after a debt is in default—the original creditor might sell your debt to a debt buyer. Debt buyers normally purchase debt for pennies on the dollar from the original creditor. The debt buyer might buy thousands of accounts at once. Because the debt buyer has purchased your debt at such a favorable price, it usually can offer the most favorable settlements. As a general rule, the longer you wait, the more favorable settlement offers you will receive. For example, the debt buyer who purchases your debt after two years will offer a better deal than will the original creditor when you are 60 days in default. (Learn about Debt Buyers and How to Negotiate With Them.)

A few drawbacks to waiting to settle, though, are damage to your credit and the debt buyer might file a collection lawsuit against you (see below). As time goes by, you'll get multiple negative marks on your credit report due to the extended default of the loan. Also, you might not want to deal with years of phone calls, letters, and collection activities by the different players as your debt gets transferred and sold. (Be aware that you might have to pay taxes on the forgiven amount. Learn more about the pros and cons of credit card debt settlement.)

Collection Lawsuits

The original creditor or debt buyer might file a lawsuit to collect from you. Debt buyers, more so than original creditors, tend to file lawsuits to collect their debts.

Why You Should Respond to a Lawsuit

If a debt buyer files a lawsuit against you, it's best to respond making the debt buyer prove its case and including any defenses you have to the suit, like the debt was discharged in bankruptcy or the statute of limitations has expired. Once you respond to the suit, the debt buyer will have to prove the amount of the debt it claims you owe and that it owns the debt. Debt buyers frequently don't succeed in litigation against consumers who fight back. This is due in large part to the fact that debt buyers often lack the documentation required to prove their case in court. (To learn more, see What To Do If A Debt Buyer Sues You).

Though, if you’re sued by the original creditor, which usually won’t have a problem coming up with the necessary documentation for proving its case, or if the debt buyer has all of the documentation that it needs to prove its case, you might want to try settling the case before it goes to trial. You might be able settle for less than what you owe. By this point though, any settlement amount will likely have attorneys’ fees and court costs added onto it. Also, be very aware of court deadlines even if you are trying to negotiate a settlement. (To learn more on negotiating credit card settlements, see Negotiating on Credit Card Debt.)

What Happens If You Don’t Respond to the Suit

If you don’t file a timely response to the lawsuit with the court, a judge may enter a default judgment against you. (A “default judgment” is an automatic win for the party that filed the suit.) The debt buyer may then use various collection methods, like garnishing your wages or levying your bank account, to collect from you.

For debt buyers, filing lawsuits against debtors is a numbers game. The debt buyer is gambling that the money it can collect after getting default judgments will be more than it spent on buying and litigating the debts. So, the debt buyer will file hundreds, if not thousands of suits, knowing that most people won’t respond. Again, if you do respond, the debt buyer could have a tough time winning the case.

Getting Help

If you’re receiving collection calls and demand letters from a creditor, collection agency, or debt buyer—or you’re already being sued—consider talking to an attorney to get advice about what to do in your particular circumstances.

Talk to a Bankruptcy Lawyer

Need professional help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
FEATURED LISTINGS FROM NOLO
Swipe to view more
NEED PROFESSIONAL HELP ?

Get debt relief now.

We've helped 205 clients find attorneys today.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you