A collection agency is a business that pursues payments on debts owed by individuals or businesses. Collection agencies can be in-house agencies (first-party agency) or external institutions (third-party agencies).
First-party agencies are usually contacted at the earlier stage of delinquency. They remind borrowers that a payment is past due and inform them of their grace period.
Beyond the grace period, collections agents usually start calling more frequently and start sending demand statements. When an account is still unpaid after some time, the account is usually turned over to a third-party agency.
Third-party agencies make a profit by getting a percentage of each payment they are able to collect. Some third-party agencies also buy out the debt for a small fraction of the cost and get to keep the entire amount paid by the debtor. Both of these practices make it imperative for the third-party agency to collect debts.
It is important as a consumer to know the specifics of the Fair Debt Collection Practices Act, which outlines practices that third-party collection agencies must adhere to. It is important because third-party agencies are notorious for the bullying and threatening methods in collecting debt payments. The Fair Debt Collection Practices Act explicitly prohibits such methods and outlines other guidelines that protect the consumer.