In theory, virtually all types of debt that is past-due can go to collections. If she wanted to, your grandmother could turn your “account” over to a debt collector after you failed to pay back the $1,000 she loaned you to buy a used car. In fact, some municipalities now use collection agencies to pursue unpaid library fines. Nationwide, about 1/3 of consumers have at least one debt in collections.
As a practical matter, though, certain types of debt end up in collections more often than others. Some of the most common include credit card debt, past-due medical bills, and delinquent student loan debt.
Why Do Certain Types of Debt Go to Collections?
One thing many of the debts that most commonly go to collection agencies or debt buyers have in common is that they are unsecured. When a consumer defaults on an unsecured credit card account or fails to pay medical bills, the creditor typically doesn’t have much leverage. An automobile finance company or another secured creditor can apply pressure by threatening to take back your car or other collateral or can repossess the car to partially cover the outstanding debt.
Your credit card company, local hospital, and other unsecured creditors don’t have those options. While they could file a lawsuit and seek to garnish wages or collect against assets, it’s often more efficient and cost-effective to leave the collections process to a professional. This happens in one of two ways:
- The creditor may retain a collection agency to collect the debt on its behalf, typically paying the collector a portion of the funds recovered, or
- The creditor may sell the debt to a debt buyer for a fraction of its value, washing its hands of the account and leaving the debt buyer to collect what it can
Although some collection accounts run to tens or even hundreds of thousands of dollars, the average collection account is just a few hundred dollars.
Credit Card Debt in Collections
One reason there’s so much credit card debt in collections is that Americans are carrying a lot of credit card debt. In fact, credit card debt makes up more than ¼ of all U.S. consumer debt. According to the Federal Reserve Bank of New York, more than 7% of that debt is 90 days or more past due.
Medical Bills in Collections
Medical debt is different from most debt collectors pursue from consumers. Unlike credit card issuers and automobile finance companies, hospitals don’t generally assess a sick or injured person’s creditworthiness before providing treatment. In addition, medical debt can climb quickly, often becoming unmanageable. And, the person receiving treatment may find his or her earning capacity interrupted, diminished, or cut off altogether by the medical condition that necessitated the treatment.
Nationwide, about 18% of households have a medical debt in collections. In some areas of the country, those numbers are much higher, even exceeding 50% in some counties.
Student Loan Debt in Collections
With the wide range of repayment options, forbearances, and other student loan debt solutions in the mix, you might not expect student loan debt to end up in collections. However, as of November of 2017, there were a total of 34 debt collection companies pursuing delinquent student loan debt. Although the federal government can take advantage of some options not available to the average creditor, such as interception of federal income tax refunds, those methods are rarely sufficient to satisfy the debt. With tens of billions of dollars in delinquent student debt, the drive to collect is strong.
Debt Collectors Have to Play by the Rules
Regardless of the types of debt involved, third-party debt collectors have one thing in common: they’re required to play by the rules set forth in the Fair Debt Collection Practices Act (FDCPA). Whether a collection agency is pursuing payment of a $25,000 outstanding medical bill or $15.38 in unpaid library fines, you have rights. If a debt collector is harassing you, using abusive language, using deceptive tactics, or otherwise violating the law, talk to an experienced consumer financial protection attorney.