Debts are frequently sold to a collection agency. Having your debt held by a collection agency can be a much worse position than just owing to the original creditor. Understanding how debts are sold to a collection agency can greatly increase your credit-related knowledge. It will also help you understand how debts are collected.
Collections concepts and terms are sometimes misunderstood. For instance, most people believe that “charged off” is a good term on credit similar to the term “written off.” “Charged off” is actually a bad term usually: it generally means that you may now have to deal with a collection agency. The original creditor believes that your balance is now a “bad debt.” They will then simply transfer it to a more aggressive collection department or even sell it directly to a collection agency.
Another concept that is important to understand is “transferring of a claim.” In our modern society, debts can actually be sold or transferred to any party. Essentially, the original creditor can just sell their right to the money owed. This includes the right for the new party to sue you for the debt. Collection agencies will frequently have claims transferred to them to pursue in collection. They are experts only in the realm of debt collection, even suing sometimes 100’s of people at one time.
When your debt is sold to a collection agency, things usually get much worse. First, the new company does not simply keep large books for people who owe money. Instead, they aggressively attack with collection letters, calls, and other forms of collection. These can be very difficult to overcome, usually forcing the person into settling the debt, getting garnished, or eventually filing for bankruptcy.
Secondly, some debts will now start appearing negatively on your credit report. Certain debts such as medical or locally-based debts usually do not even appear on your credit report until they go to a collection agency. This can take an otherwise good credit score down quickly when negative information begins appearing on the credit report.
Lastly, debts sold to a collection agency can result in massive, dead-end lawsuits. For instance, if a mortgage company forecloses on a house, there can sometimes be a large debt that floats around out there for several years against mortgage holder(s). Similarly, large or even astronomical medical debts can float out there for many years, never settled. When these debts go to collection agencies, sometimes the new creditor will immediately sue for $100,000 or whatever other large amount just to force the issue. Those who owe the money will not have a choice. Bold action will then need to be taken to counter the situation with a settlement or a bankruptcy filing.