To send someone to collections, you hire a licensed third-party collection agency to pursue the unpaid debt on your behalf, usually on a contingency arrangement where the agency keeps 15% to 50% of whatever it recovers. Before you make that call, three things need to be true: the debt is still within your state’s statute of limitations, you have documentation proving the amount is owed, and you have given the debtor a clear final chance to pay. Skip any of those and the account is likely to sit uncollected.
Confirm the Debt Is Still Legally Collectible
Every debt has an expiration date for legal enforcement, called the statute of limitations. Across the country, these deadlines run roughly three to ten years depending on the state and the type of debt; written contracts, oral agreements, and open-ended accounts like credit lines each have different clocks. Once that period runs out, the debt is “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, and it can reset. In many states, a partial payment or a written acknowledgment of the debt restarts the entire limitations period. Collectors sometimes push for a small “good faith” payment for exactly that reason. Check the deadline in your state before you place the account. A reputable agency will likely decline a time-barred debt, because neither of you can use the court system as leverage.
Gather Your Documentation
Collection agencies evaluate a debt’s collectibility before they agree to take it, and weak documentation is the most common reason an account gets passed on. Even on a contingency arrangement where you pay nothing upfront, agencies put their effort where the paper trail is clean. 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 the amount is correct: an accounting of the principal, any interest or late fees that have accrued under the agreement, and any partial payments received. A clean ledger matters more than a large balance.
- Debtor contact information: full legal name, last known address, phone number, email. Stale addresses slow everything down.
- Your own collection history: copies of every demand letter, email, text, and a log of phone calls. This shows the agency, and a judge if it comes to that, that you made genuine attempts to resolve the debt yourself.
Send a Final Demand Letter
No federal law requires a private creditor to send a formal demand letter before placing a debt with a collection agency, but doing so is worth the effort. It gives the debtor one last chance to pay before a collection fee starts eating into your recovery, and it creates a written record that you acted reasonably before escalating.
A strong demand letter states the total amount owed with a breakdown, references the contract or invoice the debt comes from, sets a firm deadline (15 to 30 days is standard), and states plainly that you will refer the account to a collection agency or pursue legal action if the deadline passes. Keep the tone professional. Threats you can’t back up or language meant to humiliate will only create problems later. Send it by certified mail and keep a copy.
If the debtor responds and disputes the amount or the validity of the debt, take that seriously. A debt with an active, legitimate dispute is a poor candidate for collections, and agencies know it. Resolve the dispute first, then decide whether to proceed.
Choose the Right Collection Agency
Not all agencies handle the same types of debt. Some specialize in medical billing, others in commercial accounts receivable, others in consumer debts like unpaid rent or personal loans. Matching the agency to your debt type improves the odds of recovery because the agency already knows the legal landscape and typical debtor responses for that category.
Verify Licensing
Most states require collection agencies to hold a license or bond to operate within the state. You can check licensing through the Nationwide Multistate Licensing System (NMLS) Consumer Access site, which is a free public database. An unlicensed agency operating in a state that requires licensing exposes both the agency and you to legal risk, and any collection it obtains could be challenged.
Understand the Fee Structure
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 based on how old and difficult the debt is. Invoices 60 to 90 days overdue tend to land at the lower end; debts over six months old push toward 30% to 50%. On a 30% contingency, a $10,000 recovery pays you $7,000.
Some agencies offer flat-fee arrangements, usually $10 to $50 per account, for high-volume, low-balance debts or early-stage collection attempts. That model works best when you have many small accounts where individual contingency math doesn’t pencil out. For complex or high-dollar debts, contingency is the standard, because neither party wants the agency to lose motivation.
Ask about add-on costs before you sign. 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.
Consumer Debt and Business Debt Are Handled Differently
The federal rules that govern collection agencies apply only to consumer debts, meaning obligations someone took on for personal, family, or household purposes.2Office of the Law Revision Counsel. 15 U.S. Code 1692a – Definitions Unpaid rent on someone’s home, a personal loan, or personal services to an individual all qualify.
Business-to-business debts, unpaid invoices between companies, and commercial contracts fall outside the FDCPA.3CFPB Consumer Laws and Regulations. Fair Debt Collection Practices Act Procedures State laws and general fraud prohibitions still apply, but the specific federal restrictions on calling times, validation notices, and prohibited language are consumer-debt rules. If you’re collecting a commercial debt, look for an agency that specializes in B2B collections; the approach and legal framework differ substantially.
You Aren’t a “Debt Collector” Until You Hire One
The FDCPA regulates third-party debt collectors, not original creditors collecting their own debts. When you personally call a debtor and ask for payment, the FDCPA’s restrictions on calling hours, validation notices, and communication rules don’t technically apply to you.2Office of the Law Revision Counsel. 15 U.S. Code 1692a – Definitions One exception: if you use a fake company name that makes it look like a third party is collecting, you become a “debt collector” under the law.
Once you hand the account to a collection agency, everything the agency does falls under federal regulation. You can’t direct the agency to call at midnight or threaten the debtor in ways the law prohibits. If your agency breaks the rules, the debtor can sue, and that lawsuit could name you if you were involved in directing the illegal conduct. Choosing a compliant agency protects you.
What Happens After You Place the Account
Once you place the account, the agency takes over communication with the debtor. For consumer debts, every step from here is governed by the FDCPA. Collectors cannot call before 8:00 a.m. or after 9:00 p.m. in the debtor’s local time zone, and they 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 the debtor a written validation notice stating the amount owed, identifying you as the creditor, and explaining the debtor’s right to dispute the debt within 30 days. If the debtor disputes it in writing during that window, the agency must stop collection activity until it provides verification, typically by forwarding the documentation you supplied when you placed the account.5United States Code. 15 U.S. Code 1692g – Validation of Debts This is where your documentation work pays off. Clean records mean verification is fast and collection resumes quickly.
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 full balance. Whether to accept is your call, since the agency works for you, though agencies often recommend taking a reasonable offer rather than holding out and getting nothing. A common settlement range is 40% to 60% of the original debt, though it varies with the debtor’s finances and the age of the account.
If the Agency Can’t Collect
If the agency can’t get the debtor to pay voluntarily, your next option is a lawsuit. Small claims court is built for this. Filing fees vary by jurisdiction, from under $20 to a few hundred dollars depending on the claim, and you generally don’t need a lawyer. Each state sets its own dollar limit for small claims, usually somewhere between $2,500 and $25,000.
For larger debts, you may need to file in a higher court, which likely means hiring an attorney. Some collection agencies have affiliated law firms that handle litigation on the same contingency basis, though legal contingency fees tend to run higher, often 33% to 50% of the judgment.
A collection agency cannot garnish wages on its own. Garnishment is a court-ordered remedy that requires you to first win a judgment and then obtain a separate garnishment order directing the debtor’s employer or bank to redirect funds to you.6Legal Information Institute. Garnishment Federal law caps wage garnishment for ordinary debts at 25% of the debtor’s disposable earnings or the amount by which weekly earnings exceed 30 times the federal minimum wage, whichever is less.7Office of the Law Revision Counsel. 15 U.S. Code 1673 – Restriction on Garnishment Many states impose stricter limits. Garnishment sounds powerful, but it’s slow, and the debtor can change jobs, move, or file bankruptcy to stop it. It often works best as leverage to force a settlement.
If the Debtor Files for Bankruptcy
A bankruptcy filing stops collection activity immediately. The moment the debtor files a petition under any chapter of the Bankruptcy Code, an automatic stay takes effect that prohibits any act to collect a debt that arose before the filing.8Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay The agency must halt calls, letters, and any pending legal action. Violating the stay can bring damages and attorney’s fees.
If your debtor files, the agency will notify you and stop work on the account. You may need to file a proof of claim with the bankruptcy court for any chance of recovering a portion of the debt. In a Chapter 7 liquidation, unsecured debts like unpaid invoices and personal loans are often discharged entirely.
Tax Consequences of a Write-Off or Settlement
If you’re a business that uses accrual accounting and included the debt as income when you invoiced it, you can claim a bad-debt deduction for the uncollectible amount. You’ll need to show you took reasonable steps to collect before writing it off.9Internal Revenue Service. Tax Guide for Small Business If you use cash-basis accounting and never recorded the money as income, there’s nothing to deduct. You can’t write off money you never reported receiving.
On the debtor’s side, settled debt can create a tax bill. When a qualifying lender or creditor cancels $600 or more of debt, the forgiven amount generally counts as taxable income for the debtor, and the creditor must report it on Form 1099-C.10Internal Revenue Service. About Form 1099-C, Cancellation of Debt That filing obligation applies primarily to financial institutions, credit unions, and organizations whose significant business is lending money.11Office of the Law Revision Counsel. 26 U.S. Code 6050P – Returns Relating to the Cancellation of Indebtedness If you’re a small business or individual creditor who isn’t in the lending business, you likely aren’t required to file a 1099-C, but the debtor may still owe tax on the forgiven amount. Mentioning that possibility during settlement talks can actually help, since paying you 60 cents on the dollar may look better than paying nothing and then owing tax on the full forgiven amount.