What Happens If You Don't Pay the Collection Agency That Bought Your Debt?
- Collection agencies that buy debt gamble on the prospect that they can get delinquent customers to pay their outstanding balances. Therefore, they often attempt to cash in on the debts they purchase by calling or writing to the debtor to request payment. Such contacts typically continue until the debtor either settles the balance, the agency's collection expenses exceed the debt value, or the debtor formally requests that the communication stop. (The Fair Debt Collection Practices Act requires bill collectors to stop all communication if the debtor submits a written "cease and desist" request.)
- If a collection agency believes that the debtor will not voluntarily pay, it may pursue legal action with the intention of forcing payment. According to the financial organization BCS Alliance, a collection agency can sue to collect an outstanding debt; depending on local and state laws, the court may award the agency the right to garnish a debtor's wages. Collection agencies typically do not initiate legal action unless the amount of the debt is sufficient to justify the legal expenses. Also, it's important to note that debtors who do not pay their debts do not go to jail in the United States.
- A debt collection agency will generally report uncollected debt to the three major credit bureaus as a "collection account." The agency may also obtain a copy of the debtor's credit report to better understand the debtor's financial position. If the debtor pays the collection agency, the agency has no obligation to remove the credit report entry; instead, the agency may simply update the entry to denote payment. These negative credit entries can prevent consumers from getting mortgages, auto loans and other forms of credit for several years after the agency makes the initial report.
- Debt collection agencies sometimes allow debtors to settle a balance at a lower amount in order to collect a profit. In other cases, an agency may write off its investment in the debt altogether. In either case, the Fair Debt Collection Practices Act allows the agency to write the unpaid portion off as a business expense with the Internal Revenue Service. When this happens, the IRS may consider the unpaid debt to be taxable income. Therefore, the collection agency may send the debtor IRS form 1099-C, which requires the debtor to pay taxes on uncollected debts totaling more than $600.
- If a collection agency cannot collect a debt, but chooses not to write it off as a business expense, it may elect to sell the debt to another collection agency. In this case, the new collection agency pays the old one a small amount for the debtor's collection account, and then begins its collection efforts.
