Describe how a collection agency works.

Question

What will be an ideal response?

Answer 1

Collection agencies buy past due accounts from lenders for pennies on the dollar. Then they turn around and try to collect the full dollar amount plus penalties and late fees. Once a lender gives up on collecting a debt, they typically sell it to a collection agency. A $500 past due account from a credit card company may sell to a collection agency for $50. Collection agencies buy lots of bad debt knowing that many will never be paid. However, because of the huge penalties and fees they tack on, they make enough money off those people who do pay that it makes up for the money they lose on the ones who never pay. The collection agency now tells the poor borrower he or she owes the $500 original balance plus $1,000 in interest, penalties, and fees. The secret is that you can negotiate and settle the debt. Even if you offer just $250, which is half of the original debt, they still make a substantial profit. You may have to negotiate (hold out) for a while but eventually collection agencies usually give in and settle the debt. In any case, do not pay the penalties and fees they added.