The Lifecycle of Credit Card Debt Collection

Learn about the steps and players involved in collecting on defaulted credit card debt.

If you fail to pay a credit card debt, you may get bombarded with calls and letters from companies that don’t appear to have anything to do with the credit card you originally used. As time goes by, you may be contacted by different companies telling you they are collecting the debt, servicing the debt, or own the debt. The various players may include original creditors, debt collection agencies, debt buyers, debt servicers, and lawyers.

Understanding the role of these different players as well understanding the lifecycle of your credit card debt can not only give you peace of mind, but may also be helpful in negotiating payments or payoffs of the debt. (For more on negotiating better credit card payoff terms, see  Negotiating on Credit Card Debt.)

Steps in the Collection of Defaulted Credit Card Debt

Below are the various companies and agents that you may encounter when you default on credit card debt and their roles in the collection of your debt.

The Original Creditor

The original creditor is the original credit card company that you incurred the debt with. For example, American Express or Discover may be original creditors.

Retailers can also be original creditors when they extend their own credit. For example, large retailers like Macy's or Target may qualify consumers for credit, have their own credit department, and issue their own retail credit cards.

No matter who the original creditor is, if you fail to pay a credit card debt, the original creditor will usually perform collection activities on their own for about 30 to 90 days. However, original creditors are often not equipped to conduct extended collections on long overdue debts. And many want to avoid the negative customer relations that collecting debt may have. For these reasons, after 30 to 90 days, they often send the defaulted credit card debt to a collection agency.

Collection Agencies

Collection agencies are hired by the original creditor to collect debt. The original creditor may pay the collection agency a percentage of the money it recovers or a flat fee. The collection agency will often refer to the original creditor as its “client,” because the original creditor still owns your loan.

The original creditor will often have a contract with the agency for a set period of time before the debt is reassigned. If the first collection agency is unsuccessful in collecting the money owed, the original creditor will often send the debt to a new collection agency. The new collection agency will have another set period of time to collect your debt, and if they are unsuccessful, the debt may be reassigned to a new collection agency, and so on.

A collection agency cannot file a lawsuit in its own name. If a lawsuit must be filed, the collection agency will give the debt back to the original creditor to file the lawsuit. This is why you may have multiple collection agencies contacting you, but then when you are sued, the original creditor is on the lawsuit.

Debt Buyers

At any time, even after a debt is years in default, the original creditor may sell your debt to a debt buyer. Debt buyers will often purchase debt for pennies on the dollar from the original creditor. The debt buyer may buy thousands of accounts at once.

Unlike the collection agency which was working for the original creditor, but did not actually own the loan, the debt buyer does own the loan.

Because the debt buyer has purchased your debt at such a favorable price, it often can offer the most favorable settlements.

Debt buyers can and sometimes do file lawsuits to collect their debts. Because they own the loan they can sue in their own name, although many debt buyers have problems in court demonstrating ownership of the loan, or providing other evidence needed to obtain a judgment against you.


Sometimes debt buyers will not collect the debt that they purchased. Rather they will hire servicers to collect on their behalf. Servicers are companies that handle the day to day management of debt, including collections. The servicer has no ownership interest in the debt, but rather, simply performs a service for the debt buyer. They will contact debtors, tabulate loan histories, and act as the agent or representative of the debt buyer.

You will often receive a letter telling you that the servicer is collecting a debt on behalf of the “owner” of the debt, which is the debt buyer.

When Lawyers Get Involved

Lawyers can be hired at any time in the collections process. The original creditor can retain an attorney, or the debt buyer can do so if it has purchased the debt. Often however, the lawyer is not retained until the debt is very much overdue.

Receiving a lawyer letter does not necessarily mean that you are being sued. Many collection law firms are in fact collection agencies in disguise, with large collection departments. The lawyers may not ever have any direct involvement with your claim or your debt. Unfortunately, short of speaking to an attorney with experience or doing a public records inquiry, there is no way to tell whether a law firm is simply a collection agency in disguise with no intention on filing a lawsuit, or whether the law firm can and will file a lawsuit against you.

Lawsuits for Credit Card Debt

Not all overdue  credit card debts result in lawsuits. Often, a lawsuit is not filed within the statute of limitations -- the time limit set by law (it varies by state) that a creditor or debt buyers must bring a lawsuit to collect on a defaulted debt. (Learn more about the  statute of limitations for debt collection lawsuits.)

If a lawsuit is filed, it is not too late to contact the attorney and try to negotiate a settlement, although by this point, any settlement amount may have attorneys fees added onto it. You should be very aware of court deadlines even if you are trying to negotiate a settlement.

Getting the Best Settlements on Credit Card Debt

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.

The drawback to waiting, however, is damage to your credit. As time goes by, there will likely be multiple negative markings on your credit report due to the extended default of the loan. There is also your peace of mind to consider. You may not want to deal with years of phone calls, letters and collection activities by the different players as your debt gets transferred and sold. (Learn more about the  pros and cons of credit card debt settlement.)

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