To send someone to collections, send a final written demand, pull together the paperwork that proves the debt, verify the statute of limitations hasn’t run, choose a licensed collection agency, and submit a referral that hands the account over for the agency to pursue. Most creditors take this step after 90 to 120 days of failed payment attempts, though nothing stops you from moving sooner if outreach has clearly failed.
Send a Written Demand Letter First
Before a third party gets involved, mail the debtor a clear written demand. No federal law requires this, but it does two useful things: it creates a paper trail showing you tried to resolve the matter directly, and it sometimes prompts payment without the cost of an agency.
A strong demand letter includes the total amount owed, a reference to the original agreement, a specific deadline for payment (typically 10 to 30 days), and a statement that you intend to refer the account to a collection agency or pursue legal action if the deadline passes. Send it by certified mail with return receipt so you can prove delivery. If the debtor responds with a partial payment or a dispute, document that too. Keep copies of every letter, email, and text message about the debt.
Gather Your Documentation
A collection agency will not take your account seriously, and may reject it outright, without solid proof that the debt exists and that the amount is accurate. Pull the following together before you contact anyone:
- The signed agreement or contract where the debtor agreed to pay: a loan agreement, service contract, invoice with accepted terms, or purchase order.
- An itemized ledger showing the original balance, any partial payments received, interest or late fees added (only if your contract or applicable law allows them), and the current total owed.
- Proof of delivery or performance: signed delivery receipts, completed work orders, time logs, or other evidence that you held up your end.
- Debtor identification: full legal name, last known address, phone number, email, and if available Social Security Number or Tax ID. The more identifying information you provide, the easier it is for the agency to locate the person and verify identity.
- Your communication history, including the demand letter and any responses.
Federal law requires that a debt collector be able to validate a debt when challenged. Under 15 U.S.C. ยง 1692g, the collector must give the debtor the amount owed, the name of the creditor, and notice of the right to dispute within 30 days.1Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts If the debtor disputes and the collector cannot produce verification, collection activity has to stop until it does. That verification comes from your file, so gaps in your documentation can stall or kill the effort.
Check the Statute of Limitations
Every state sets a deadline, called a statute of limitations, on how long a creditor can sue to collect. Once that window closes, the debt is “time-barred.” Most states set the period somewhere between three and six years, though some allow longer depending on the type of debt and the law specified in the credit agreement.2Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old Federal student loans have no statute of limitations at all.
A time-barred debt doesn’t vanish. The debtor still owes the money, and an agency may still contact them in many states to request payment. But it’s illegal under federal law for a debt collector to sue or threaten to sue over a time-barred debt.3Consumer Financial Protection Bureau. Fair Debt Collection Practices Act Regulation F – Time-Barred Debt If you send a time-barred account to collections and the agency files suit, both of you can face legal consequences.
One wrinkle: if the debtor makes even a small payment or acknowledges the debt in writing, the clock can restart in many states, giving you a fresh limitation period.4Federal Trade Commission. Debt Collection FAQs Your agency should understand these rules, but the initial responsibility to verify timing falls on you.
Choose a Collection Agency
Not all agencies handle the same kinds of debt. Some specialize in consumer accounts (credit cards, medical bills, personal loans) while others focus on commercial receivables between businesses. Picking the wrong type can lead to compliance problems, because consumer debt collection carries stricter federal regulation than commercial work.
Licensing and Bonding
Most states require collection agencies to hold a license, post a surety bond, or both before they can operate in that state. Requirements vary a lot. Some states have no licensing requirement, while others charge substantial filing fees and mandate specific bond amounts. Verify that any agency you consider is properly licensed in the state where your debtor lives, not just where the agency is headquartered.
Fee Structures
Collection agencies typically work on contingency: you pay nothing unless they recover money. Contingency fees generally range from 25 to 50 percent of the amount collected, with older and smaller debts commanding higher percentages because they’re harder to recover. Some agencies charge flat upfront fees for complex or high-risk accounts. Ask for the fee structure in writing before you sign, and confirm whether the agency deducts its fee before or after sending you the recovered funds.
Hiring an Agency vs. Selling the Debt
You also have the option of selling the debt outright to a debt buyer. A buyer purchases the account at a steep discount, often 5 to 20 cents on the dollar, and then owns the right to collect the full amount. You get immediate cash but far less than face value. With a contingency agency, you keep ownership and receive a larger share of whatever is recovered, but you may wait months or get nothing. The right choice depends on the age of the debt, how likely recovery seems, and whether you need cash now.
Complete the Collection Referral
Once you’ve picked an agency, you’ll fill out a collection referral form, the formal document authorizing the agency to pursue the debt on your behalf. Most agencies provide this through a secure online portal, though some accept mailed paperwork. Accuracy matters. Errors can delay the process or send the agency after the wrong person.
The referral form typically asks for:
- Your business information: legal name, address, tax identification number, and a contact person the agency can reach with questions.
- Debtor information: full legal name, last known address, phone numbers, email, employer if known, and Social Security Number or Tax ID if you have it.
- Financial details: original principal, any contractually authorized interest or fees, payments already received, and the current balance. Keep interest and fees in separate fields so the calculation is transparent to the agency and, eventually, the debtor.
- Key dates: the date of the original transaction, the date of the last payment, and the date you charged the account off. The last payment date is especially important for the statute of limitations analysis.
- Supporting documents: copies of the signed agreement, invoices, ledger, proof of delivery, and your demand letter with proof of mailing.
A collector can only add interest, fees, or charges to the balance if the original agreement expressly allows it or a specific law permits it.5Office of the Law Revision Counsel. 15 USC 1692f – Unfair Practices If your contract is silent on collection costs, the agency cannot tack them onto what the debtor owes. Review the agreement carefully before listing any charges beyond the original principal and contractual interest.
What Happens After You Submit
Once the agency receives your referral and you sign the service agreement, the account is in their hands. The agency has to send the debtor a written validation notice within five days of first contacting them. Under Regulation F, that notice must include the amount of the debt, the names of both the original and current creditor, an itemized breakdown of the balance, and a clear explanation of the debtor’s right to dispute within 30 days.6Consumer Financial Protection Bureau. 12 CFR 1006.34 – Notice for Validation of Debts If the debtor disputes in writing during that window, the agency must pause collection until it provides verification, which is why the file you assembled needs to be thorough from the start.1Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts
Most agencies provide an online dashboard where you can track communication attempts, payment status, and settlement offers. The agency handles direct contact with the debtor from this point forward. You’ll typically receive disbursements on a monthly cycle as funds come in, minus the contingency fee. Stay responsive: if the agency asks for additional documentation or learns new information about the debtor’s location, a quick reply keeps things moving.
Rules Your Agency Has to Follow
The Fair Debt Collection Practices Act applies to third-party debt collectors (the agency you hire) and generally doesn’t cover you as the original creditor collecting your own debt.7Office of the Law Revision Counsel. 15 USC 1692a – Definitions Once you hand the account off, though, the agency’s conduct can create legal exposure that flows back to you. Key restrictions on the agency:
- No contact before 8 a.m. or after 9 p.m. in the debtor’s time zone.
- No harassment, threats, or abusive language. The agency cannot threaten arrest, use profanity, or call repeatedly to annoy.
- No false representations about the amount owed, no claiming to be an attorney, no implying that nonpayment is a crime.
- No further contact with the debtor directly once the agency knows the debtor has counsel; communication has to go through the attorney.
If the agency violates these rules, the debtor can sue and recover actual damages, statutory damages up to $1,000 per individual action, plus attorney’s fees.8Office of the Law Revision Counsel. 15 USC 1692k – Civil Liability Some states have their own debt collection laws that reach further than the federal rules and may apply to original creditors as well. Choosing a reputable, well-reviewed agency with a clean regulatory history is your best protection against liability tracing back to your account.
When Small Claims Court Makes More Sense
Hiring an agency isn’t always the best path, especially for smaller debts where the contingency fee would eat most of what you recover. Small claims court lets you sue the debtor directly, typically without an attorney. Filing fees range roughly from $15 to over $300 depending on the state and the amount claimed. Maximum claim limits vary widely, from as low as $2,500 in some states to $15,000 or more in others.
Small claims works best when you have strong documentation, the debtor has identifiable assets or income, and the amount falls within your state’s limit. Win a judgment and you can often use wage garnishment or bank levies to collect, though enforcement sometimes requires additional effort. For debts above the small claims cap, you’d need to file in a higher court, which usually means attorney fees and a longer timeline. Many creditors start with a collection agency and escalate to litigation only if the agency’s efforts fail.