Guide
What Is a Collection Agency? A Guide for Creditors
Updated October 18, 2026 · CollectionPlacement editorial team
A collection agency is a business that collects unpaid debts on behalf of the creditor that is owed the money. It usually works on contingency, keeping a share of what it recovers. It contacts the debtor, negotiates payment or a plan, and sends the rest to the creditor. This guide is for businesses placing debts. It explains what agencies do, how they're paid, how to check one is legitimate, and how they differ from attorneys and debt buyers.
Being contacted by a collector? See the CFPB's debt collection resources (consumerfinance.gov/consumer-tools/debt-collection/).
Ready to place an account? Follow our step-by-step placement guide. Get matched with a collection agency, free →
What a collection agency does
- Contacts the debtor by letter, phone, email and text, within federal and state rules.
- Locates debtors who have moved, using skip tracing (skip tracing for creditors).
- Negotiates full payment, a settlement you've authorized, or a payment plan.
- Remits what it collects to you, minus its fee, with reports on each account.
- May report accounts to credit bureaus, if it furnishes data and the law allows.
- Refers accounts to attorneys for suit, usually with your approval, when that makes sense. Generally, only a court judgment lets you use enforcement tools like wage garnishment and bank levies, subject to state law and exemptions.
The FDCPA applies to 'debt collectors', meaning third parties who regularly collect consumer debts owed to someone else. Creditors collecting their own debts under their own name generally aren't covered, unless they use a different name that suggests a third party is involved (15 U.S.C. §1692a(6)). For consumer debts, third-party agencies must follow the Fair Debt Collection Practices Act (15 U.S.C. §1692 et seq.) and the CFPB's Regulation F (12 CFR part 1006). The FTC also explains the rules (FTC: debt collection).
How collection agencies get paid
Most agencies work on contingency: they keep an agreed percentage of what they recover and charge nothing if they collect nothing. Rates vary with the debt's age, balance, type and volume. Some agencies offer flat-fee services, such as a fixed price per account for a series of demand letters. See how much collection agencies charge.
How to tell if a collection agency is legitimate
A legitimate collection agency is licensed or registered where the law requires, can show bonding and trust-account arrangements where required, gives you a clear written contract, and has a clean enforcement record. Check each point below before placing accounts, and walk away from any agency that won't put its fees and terms in writing.
- Licensing. Many states require collection agencies to be licensed or registered. Check the state regulator's license lookup, or NMLS Consumer Access for states that use it. See how to verify a license.
- Bonding. Some states require a surety bond. Ask for proof.
- Trust accounts. Ask whether collected funds are held in a separate trust account, which some states require.
- References and track record. Ask for references from creditors with your debt type.
- Enforcement history. Search the CFPB's enforcement actions, the FTC's cases and your state regulator.
- A clear written contract that spells out fees, remittance and how you can recall accounts.
Collection agency vs. attorney vs. debt buyer
| Collection agency | Collection attorney | Debt buyer | |
|---|---|---|---|
| Who owns the debt | You | You | The buyer, after purchase |
| What it does | Letters, calls, negotiation | Lawsuits, judgments, enforcement | Collects for itself |
| How it's paid | Usually contingency | Contingency, hourly or flat fees, plus costs | You get a one-time price for the debt |
CollectionPlacement doesn't buy debt. We match creditors with collection agencies and law firms. If you'd rather hire an attorney, we can match you with one too.
How we're paid: Matching is free for creditors. Some collection agencies in our network pay us a referral fee when we introduce them to a creditor. Law firms don't pay us referral fees.
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Not legal advice. This page is general information, not legal advice, and laws vary by state and change over time. CollectionPlacement is a referral service, not a law firm or collection agency. Consult a licensed attorney about your situation.
Questions creditors ask
What is a collection agency?
A collection agency is a business that collects unpaid debts for the creditor that is owed them, usually in exchange for a percentage of what it recovers. It contacts the debtor, negotiates payment or a plan, and sends the creditor the proceeds minus its fee. For consumer debts, it must follow the FDCPA and Regulation F.
What does a collection agency do?
A collection agency contacts debtors by letter, phone, email and text, finds debtors who have moved, negotiates payments, settlements or plans within limits you set, sends you what it collects minus its fee, and reports on each account. Some report to credit bureaus. Many refer accounts that won't resolve to attorneys, usually with your approval.
How do I know if a collection agency is legitimate?
Check that it's licensed or registered where the law requires, using the state regulator's lookup or NMLS Consumer Access. Ask about bonding and whether it holds collected funds in a trust account. Get references from creditors like you, search CFPB and FTC enforcement actions, and make sure the contract spells out fees, remittance and recall.
Should I place the debt with an agency or sell it to a debt buyer?
Placing keeps you as the owner. The agency collects for a contingency fee, and you keep the rest of what's recovered. Selling gives you a one-time payment, but the buyer owns the debt and keeps whatever it collects. The right choice depends on the debt's age, documentation and your need for cash now. CollectionPlacement doesn't buy debt.
Can an HOA send dues to collections?
Yes. A homeowners association can generally place unpaid dues and assessments with a collection agency or attorney, following its governing documents and state HOA law. Many states also give HOAs lien or foreclosure rights with specific notice steps. Courts have generally held that HOA dues and assessments on a home are consumer 'debts' under the FDCPA (for example Ladick v. Van Gemert, 146 F.3d 1205 (10th Cir. 1998); Newman v. Boehm, Pearlstein & Bright, 119 F.3d 477 (7th Cir. 1997)), so third-party collectors must follow the FDCPA and Regulation F. Dues on investment or commercial property may fall outside it.
Can a gym send a member to collections?
Yes, if the member owes money under a valid membership agreement, such as unpaid dues or cancellation fees. Some states have health club laws on contract terms and cancellation rights, so check that the charges are allowed and properly disclosed. Personal gym memberships are generally consumer debts, so third-party collectors must follow the FDCPA and Regulation F.
Can a company send a chargeback to collections?
Often, yes. If a customer reversed a card payment for goods or services you delivered, you can generally pursue the amount as an unpaid debt. Respond to the dispute through your payment processor first and keep the delivery proof. The card network's decision is between you, your processor and the card issuer; it doesn't decide whether the customer owes you under your contract. Consumers have billing-error and claims-and-defenses rights under the Fair Credit Billing Act (15 U.S.C. §1666, §1666i), and if the debt is a consumer debt, a third-party collector must follow the FDCPA. Business-purpose card disputes fall outside these consumer protections.
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