Understanding the Credit Lifecycle – What is First-Party and Third-Party Collections?

Key Takeaways
  • First-party debt collectors include the collection activity of the original lender.
  • Third-party debt collections involve collection efforts from a different company or third party.
  • Third-party collections can include those working under contract for the original creditor or a company that purchased the debt.
  • The FDCPA regulates third-party collection activity.
  • A change in the company collecting on the account or a change in account ownership does not alter your legal obligation to repay the debt.
  • Both the original lender and a debt collection agency will negotiate a lower payoff on a delinquent account.

Part 3 of a 5-part series on the credit lifecycle. This series on the Credit Lifecycle also includes Understanding the Value of Your Debt Over Time, and Pre-Charge-Off Collection Practices. (Links to previous articles)

When you miss payments on your credit card bill, the creditor or bank will begin debt collection procedures. Accounts requiring collection measures fall into two major categories, first-party and third-party collections. 

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First Party Collections

A first-party debt collector owns the debt and collects the debt on their own behalf. For example, if you have a credit card with Bank “A”, and a representative from Bank “A” contacts you with regard to the debt, this is a first-party debt collector.     

Within the category of first-party debt collectors, there are two general types: the original creditor and the debt buyer. The original creditor is the company that issued the loan, where a debt buyer purchases the debt from either the original creditor or another debt buyer.  

There are advantages of working with a first-party debt collector when negotiating a debt settlement. The account owner has more leeway to lower the amount required to pay off the account and the payment structure required.  

Third-Party Collections

Third-Party debt collectors contract with debt owners to collect debts on their behalf. For example, Bank “A” has the option to hire an “ABC” Debt Collection Agency to collect past due debts. In this case, the “ABC” Debt Collection Agency is the one communicating with you, rather than Bank “A”.  

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Creditors often contract with third-party agencies agreeing to pay a commission or a certain percentage of all collected amounts. These agencies can only accept the terms within the accepted parameters provided by the debt owner. A debt collection agency will attempt to collect the debt for three months or longer, before returning uncollectable accounts back to the debt owner. 

Both the original creditor and a debt buyer can hire a debt collection company to collect debts on their behalf, creating third-party debt collections.

Regulations in Debt Collections

The FDCPA (Fair Debt Collection Practices Act) deals specifically with the collection of debts by a third-party. The Act dictates how and when an agency may contact you, along with whom they may speak to regarding your debts. You also have protections that cover notifications, communications, and other aspects of the debt collection process.  

Although debt owners must abide by a separate set of laws, in almost all cases, they follow the rules established through the FDCPA. 

What Are My Legal Obligations to Repay the Debt?

Whether the original lender, a debt buyer, or a third-party company contacts you regarding your debt, your legal obligations to repay the debt does not change. Furthermore, debt owners have a legal right to collect debts forever, however, the statute of limitations or the length of time under which you may be sued by a creditor to collect a debt is limited and varies by state.  

Be Aware of the Statute of Limitations Period in your State

One thing to consider with respect to the statute of limitations is that if you make a partial payment on the account at any time prior to the expiration of the statute of limitations, the time period will reset and the creditor will then have the full length of time to once again sue for collection of the debt. Any payment of any amount during the statute of limitations will reset the clock and give the creditor more time to bring a lawsuit to recover the debt.

Credit Impact

Missing payments on credit card debt will impact your credit score. However, only the original creditor and one collection agency may list the debt on your report. All delinquencies remain on your credit file for seven years. Selling the debt or using a collection agency does not re-start the seven-year timeframe.   

The FCRA (Fair Credit Reporting Act) requires accurate reporting of your debts to the credit bureau. You can remove multiple records of the same debt on your credit file by filing a dispute with each agency that has inaccurately reported the item on your credit file

Final Thoughts

There can be advantages to negotiating with the original lender or the subsequent debt buyer because they have more flexibility in negotiating a settlement for less than the full balance of the debt owed. Debt settlement professionals have a unique relationship with creditors to negotiate on your behalf. Debt negotiation professionals work closely with creditors, debt buyers, and collection agencies and understand the policies and parameters for the settlement of many of these creditors and debt buyers.  These relationships are not adversarial and, therefore, are conducted without emotion and with a mutual benefit to all parties.  For this reason, debt negotiation can be a positive outcome for many who desire to be free from debt and unattached from the burden of negotiating with aggressive collectors. Being in debt and settling it is not easy but finding out your options should be. If you’re working with debt settlement professionals, make sure your options are understandable and clearly stated. Ask questions and then move forward considering your short-term and long-term financial goals.  

  • How do I know who owns my debt?

    The law requires notifications when a debt changes ownership. The creditor must forward a letter notifying you of the sale and the new owner must communicate ownership within 30 days of the transfer. If you have not received any such notifications, then the collection agency that is calling is working for your original lender.

  • What is a first-party payment on a debt?

     A first-party payment pays the original lender directly. Collection calls, especially early in the account delinquency, are often from the original lender.

  • Does the FDCPA regulate first-party collection activity?

     The FDCPA applies specifically to third-party collections. The law could apply to a third-party collecting on behalf of the original creditor or a debt buyer who purchased the debt. The CFPB has recently made rulings that could expand the scope of the FDCPA to include collection activities involving the original lender.