To send someone to collections, you hire a licensed third-party collection agency to pursue the unpaid debt for you, usually on a contingency fee of 15% to 50% of whatever they recover. Before you make that call, confirm the debt is still within your state’s statute of limitations, assemble the paperwork that proves it’s owed, and send a final demand letter so the debtor has one last chance to pay. A well-documented, clearly owed, in-time debt is the one agencies actually work; a thin file tends to sit.
Confirm the Debt Is Still Legally Collectible
Every debt has an expiration date for legal enforcement called the statute of limitations. Depending on the state and the type of debt, that window runs roughly three to ten years, with written contracts, oral agreements, and open-ended accounts each on their own clock. Once the period lapses, the debt becomes time-barred, and a collector who sues or threatens to sue over it violates the Fair Debt Collection Practices Act.1Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old
The clock starts when the debtor first falls behind. In many states, a partial payment or a written acknowledgment resets it, which is why collectors sometimes press for a small “good faith” payment that revives the right to sue for the full amount. Check your state’s limit against the date of first delinquency before placing any account. If the window has closed, a reputable agency will usually decline the file, because the court system is off the table as leverage.
Know Which Debts This Process Covers
The federal rules that govern collection agencies apply to consumer debts — obligations the debtor took on for personal, family, or household purposes.2Office of the Law Revision Counsel. 15 U.S. Code 1692a – Definitions Unpaid rent on a home, a personal loan, personal services billed to an individual: all consumer. Unpaid invoices between companies, commercial contracts, and wholesale accounts are business-to-business debts and sit outside the FDCPA.3CFPB Consumer Laws and Regulations. Fair Debt Collection Practices Act Procedures If your debt is commercial, look specifically for a B2B collections agency; the legal framework and tactics differ.
One point creditors often get wrong: the FDCPA regulates the third-party agency, not you as the original creditor collecting your own debt. The restrictions on calling hours, validation notices, and permissible language apply once the account is placed. The exception is if you collect under a fake company name designed to look like a third party, which pulls you into the statute.2Office of the Law Revision Counsel. 15 U.S. Code 1692a – Definitions Picking a compliant agency matters because a debtor can sue over illegal conduct, and that suit can reach you if you directed it.
Document the Debt Before You Place It
Agencies evaluate a file’s collectibility before they agree to take it, and thin documentation is the most common reason an account gets passed over. Before you contact anyone, pull together:
- Proof the debt exists: the original contract, signed agreement, invoice, loan document, or lease showing the debtor agreed to pay a specific amount under specific terms.
- Proof of the amount: an accounting of principal, any interest or late fees allowed under the agreement, and any partial payments received. A clean ledger carries more weight than a large balance.
- Current contact information for the debtor: full legal name, last known address, phone, email. Stale addresses slow everything down.
- Your own collection history: copies of demand letters, emails, texts, and a log of calls. This shows the agency, and a judge if it comes to that, that you tried before escalating.
Even on a pure contingency arrangement where you pay nothing upfront, agencies allocate effort toward accounts they can prove. Without the paper trail, you’re asking them to chase money whose existence they can’t verify when the debtor disputes.
Send a Final Demand Letter
No federal law requires a private creditor to send a formal demand letter before placing a debt. Doing it anyway is worth the time. It gives the debtor one last chance to pay before a collection fee eats into what you recover, and it creates a written record that you acted reasonably.
A strong letter states the total owed with a breakdown, references the contract or invoice the debt arises from, sets a firm payment deadline (15 to 30 days is standard), and says plainly that the account will go to a collection agency or to court if the deadline passes. Keep the tone professional. Threats you can’t back up or language meant to humiliate will cause problems later. Send it by certified mail and keep a copy.
If the debtor writes back and disputes the amount or the debt itself, take it seriously. An account with a live, legitimate dispute is a poor collections candidate, and agencies know it. Resolve the dispute first, then decide whether to proceed.
Choose the Right Collection Agency
Agencies specialize. Some work medical billing, others commercial accounts receivable, others consumer debts like unpaid rent and personal loans. Matching the agency to your debt type improves recovery because the firm already knows the legal terrain and the usual debtor responses in that category.
Verify Licensing
Most states require collection agencies to hold a license or bond before operating within the state. You can look up an agency through the Nationwide Multistate Licensing System (NMLS) Consumer Access site, which is free and public. Using an unlicensed agency in a state that requires licensing exposes you to legal risk, and any collections obtained can be challenged.
Understand the Fees
Most agencies work on contingency: they keep a percentage of what they collect and charge nothing if they fail. Rates typically fall between 15% and 50%, climbing with the age and difficulty of the debt. Invoices 60 to 90 days overdue land at the lower end; debts over six months old push toward 30% to 50%. If an agency recovers $10,000 on a 30% contingency, you receive $7,000.
Flat-fee arrangements, usually $10 to $50 per account, exist for high-volume, low-balance debts or early-stage attempts. That model fits creditors with many small accounts where contingency math doesn’t pencil out. For complex or high-dollar debts, contingency is standard because it keeps the agency motivated.
Ask about add-on costs before signing. Legal action fees, skip-tracing charges to locate a debtor who has moved, court filing fees, and process server costs are often billed separately from the contingency percentage. A reputable agency discloses all of this upfront.
What Happens After You Place the Account
Once the agency has the file, it handles communication with the debtor. For consumer debts, every step from here forward is governed by the FDCPA.
Initial Contact and Validation Notice
The agency reaches out by letter, phone, or both. Collectors cannot call before 8:00 a.m. or after 9:00 p.m. in the debtor’s local time, and cannot contact the debtor at work if they know the employer prohibits it.4Office of the Law Revision Counsel. 15 U.S. Code 1692c – Communication in Connection With Debt Collection
Within five days of first contact, the agency must send a written validation notice stating the amount owed, identifying you as the creditor, and informing the debtor of the right to dispute within 30 days. If the debtor disputes in writing during that window, the agency must stop collection activity until it provides verification, usually by forwarding the documentation you supplied.5United States Code. 15 U.S. Code 1692g – Validation of Debts Clean records make verification quick and let collection resume. Thin records stall it.
Negotiation and Settlement
Many accounts end in negotiation rather than full payment. The agency may propose a payment plan or a lump-sum settlement for less than the balance. The decision is yours; the agency works for you. Settlement ranges of 40% to 60% of the original debt are common, though the number varies with the debtor’s finances and the age of the account.
Credit Reporting as Leverage
When a collection agency reports an unpaid account to the credit bureaus, the delinquency can remain on the debtor’s credit report for up to seven years. That clock runs from 180 days after the original delinquency, meaning the date you first marked the account past due, not the date the agency received the file.6Office of the Law Revision Counsel. 15 U.S. Code 1681c – Requirements Relating to Information Contained in Consumer Reports
The credit mark is one of the strongest tools an agency has, and for many debtors the prospect of a seven-year entry is what moves them to pay or settle. Not every agency reports to the bureaus, though, so confirm the practice before placing the account if you want that lever.
If the Debtor Files Bankruptcy
A bankruptcy filing stops all collection activity immediately. The automatic stay under the Bankruptcy Code prohibits any act to collect, assess, or recover a debt that arose before the filing.7Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay Calls, letters, and pending legal action must halt. Violating the stay can bring damages and attorney’s fees.
If your debtor files, the agency will notify you and stop work. To have any chance of recovery through the bankruptcy process, you may need to file a proof of claim with the bankruptcy court. In Chapter 7 liquidation, unsecured debts like unpaid invoices and personal loans are often discharged entirely, meaning you receive nothing. Chapter 13 reorganizations may pay a percentage over time, but not the full amount.
When Collections Fails: Lawsuit and Garnishment
If the agency can’t get voluntary payment, a lawsuit is the next step. For smaller debts, small claims court is built for this. Filing fees vary by jurisdiction, often ranging from under $20 to a few hundred dollars depending on the claim size, and you generally don’t need a lawyer. Each state sets its own small-claims dollar limit, usually between $2,500 and $25,000.
Larger debts move to a higher court, which typically means hiring an attorney. Some collection agencies have affiliated law firms that take litigation on contingency, though legal contingency fees run higher, often 33% to 50% of the judgment.
Wage garnishment is not something a collection agency can do on its own. It is a court-ordered remedy that requires you to first win a judgment against the debtor and then obtain a separate garnishment order directing the employer or bank to redirect funds.8Legal Information Institute. Garnishment Federal law caps garnishment for ordinary debts at 25% of disposable earnings or the amount by which weekly earnings exceed 30 times the federal minimum wage, whichever is less.9Office of the Law Revision Counsel. 15 U.S. Code 1673 – Restriction on Garnishment Many states set stricter limits. Garnishment works slowly, one paycheck at a time, and debtors can change jobs, move, or file bankruptcy to interrupt it. It is often more useful as leverage toward a settlement than as a primary recovery method.
Tax Side of Unpaid and Settled Debts
If your business uses accrual accounting and recorded the debt as income when it was invoiced, you can claim a bad-debt deduction for the uncollectible amount. You need to show you took reasonable steps to collect before writing it off.10Internal Revenue Service. Tax Guide for Small Business If you use cash-basis accounting and never recorded the money as income, there is nothing to deduct.
On the debtor’s side, settled debt can generate a tax bill. When a qualifying lender or creditor cancels $600 or more of debt, the forgiven amount generally counts as taxable income to the debtor, and the creditor must report it on Form 1099-C.11Internal Revenue Service. About Form 1099-C, Cancellation of Debt The filing obligation applies primarily to financial institutions, credit unions, and organizations whose significant business is lending money.12Office of the Law Revision Counsel. 26 U.S. Code 6050P – Returns Relating to the Cancellation of Indebtedness A small business or individual creditor outside the lending business typically isn’t required to file a 1099-C, though the debtor may still owe tax on the forgiven amount whether or not a form is issued. If you’re negotiating a steep settlement, raising this with the debtor can help close the deal: paying 60 cents on the dollar can look better than paying nothing and then owing tax on the full forgiven balance.