Creditors vs. Third-Party Collectors

Where your debt is matters when it comes to solving it.

Finding the right debt solution is usually highly dependent on where it is in the collection process. The steps you can take to find relief and the laws that protect your rights are actually very different depending on whether the debt is with the original lender or if it’s already gone to a third-party collector. It’s the difference between a delinquent debt and a debt that’s been moved to charge-off status.

Fact: About one in every 25 consumers has a credit card that’s in collections.

The information below can help you understand what you should do, depending on whose holding your debt and what exactly that means for your financial outlook and your credit. If you have questions or need to find solution that work for your situation, call us or complete the form to the right to connect with the specialists you need.

Delinquent v. Charge-off

When you start to fall behind with a credit card or loan, it doesn’t immediately go to collections. It has to be moved to charge-off status by the creditor or lender first.

The Federal Reserve defines the two terms thusly:

  • Delinquent debts are past-due more than 30 days, but not yet in charge-off status. They’re often still accruing interest.
  • Charge-offs are loans that the creditor has removed from their books and charged against their loss reserves. Basically, the creditor has written your debt off as a bad debt that they don’t expect to be repaid.

Once a debt becomes a charge-off, it’s usually sent to a collector. This usually happens around 6 months without any payment received. Before this, the debt is still delinquent, but the creditor is still holding out hope you may repay. So where you are in this process matters.

If your debt is with the creditor…

This is actually good news for you, even though it means your rights aren’t protected Fair Debt Collections Practices Act. It may mean more calls and stress for you, but it also means there are more options available for debt relief. So you need to take action quickly, because it’s actually in your best interest to keep the debt out of charge-off status.

Follow these tips:

  • Don’t dodge the calls! Dodging collectors is one thing, but dodging your actual creditors isn’t doing you any favors. If they can’t get ahold of you, then they’ll just send your debt to collections and then you’ll be stuck.
  • Find a solution that works. Don’t procrastinate or ignore the problem. Call for credit counseling to get an idea of what kind of help you need. Solutions can often be customized based on your means, so even with limited income you may be able to find a way to work something out.
  • Stay in contact. If you talk to to your creditor and are honest about your circumstances, they may be willing to help you work something out themselves. Or you can tell them about the steps you’re taking on your own with a credit counselor or a similar solution. In any case, the more contact you keep, the less likely you are to end in charge-off.

If your debt is with the collector…

Once your debt is charged-off, it goes into debt collection. At that point, your rights are protected by the FDCPA so you need to brush up on what that means. It also means you have different options for dealing with the debt to stop those calls. Credit counseling and debt consolidation usually won’t work. Instead you may have to take a different path forward.

Here are the options you have available if your debt has already been moved to charge-off status:

  • Try and settle the debt for less than you owe with a debt settlement program.
  • File for bankruptcy, which initiates an automatic stay on any collection process (so collectors can’t call you once you file).
  • Answer the phone and tell the collector you do not intend to repay the debt and to stop contacting you. They must cease contact and if they want their money, they have to take you to court.
  • Try to play the dodging game with your collectors until you have the means to pay it back or for the next fifteen years until the statute of limitations expires – or until they find and sue you to collect.

Remember that if a collector decides to sue you in court to collect their money, it can really leave you in a bind. The court can garnish your wages and tax returns, and the amount of the garnishment will be based on the total amount you owe rather than your income or financial situation. As a result, a big percentage of your paychecks could be gone to garnishment for something like credit card debt.