Definition Explained with Real-life Examples and Strategies for Success

What are Collections? Here’s What You Should Know

If you’ve ever encountered the term “collections” and found yourself scratching your head, you’re not alone. It’s time to unravel the mystery around this financial term and help you make more informed decisions. In this post, we’ll explore the collections definition, breaking it down in a way that’s easy to understand.

By the end, you’ll have a clear grasp of what collections are and why they matter in the financial world. So, stick around, and let’s dive into this essential piece of financial knowledge.

Collections Definition

Collections, in the financial context, refer to the process of pursuing overdue payments from borrowers who have failed to fulfill their obligations on debts, such as loans, credit cards, or other lines of credit. When a borrower is unable to make timely payments or defaults on their debt, the lender or creditor may initiate the collections process to recover the outstanding amount.

Typically, the collections process involves multiple stages:

Internal Collections

Initially, the original creditor may attempt to recover the debt through their in-house collections department. This often involves sending payment reminders, making phone calls, or offering alternative payment plans to the borrower.


If the debt remains unpaid after a certain period (usually 90-180 days past due), the creditor might “charge off” the debt, meaning they consider it a loss for accounting purposes. However, this doesn’t mean the borrower is no longer responsible for the debt.

Debt Collection Agencies

If internal efforts fail, the creditor may sell the debt to a third-party debt collection agency or hire one to collect the debt on their behalf. These agencies specialize in pursuing overdue debts and usually receive a percentage of the collected amount as their fee.

Legal Action

In some cases, if the debt collection agency is unable to recover the debt, the creditor may take legal action against the borrower, which could result in wage garnishment, asset seizure, or other court-ordered measures to repay the debt.

It’s important to note that collections activities are regulated by laws like the Fair Debt Collection Practices Act (FDCPA) in the United States, which protects consumers from abusive, deceptive, or unfair debt collection practices.

Being aware of your rights can help you navigate the collections process and safeguard yourself from potential harm to your financial well-being.

collections definition

Real-Life Example:

Imagine you have a credit card with a balance of $5,000. You’ve been making minimum monthly payments, but suddenly, you lose your job and can no longer afford even those small payments. As a result, you miss three consecutive payments, and your account becomes 90 days past due.

At this point, the credit card company’s internal collections department starts contacting you via phone calls, emails, and letters to remind you of your overdue balance and to try to work out a payment plan. You’re still unable to pay, and the account reaches 180 days past due.

The credit card company decides to charge off the debt and sell it to a third-party debt collection agency. The debt collection agency then begins contacting you, attempting to recover the outstanding balance. They may offer you a settlement for a reduced amount or a new payment plan to make it easier for you to pay off the debt.

If you still don’t pay the debt and the collection agency exhausts its efforts, the credit card company might decide to take legal action against you. This could involve filing a lawsuit, and if they win, they may be granted the right to garnish your wages or seize your assets to recover the debt.

Throughout this entire process, it’s crucial to be aware of your rights under the Fair Debt Collection Practices Act (FDCPA) and to communicate with creditors and debt collectors to try to find a solution that works for your financial situation.

Final Thoughts

Understanding the collections definition is crucial for anyone who borrows money or uses credit. By being aware of the consequences of missed payments and the various stages of the collections process, you can better navigate your financial responsibilities and avoid the pitfalls of debt.

Remember, the key to maintaining a healthy financial life is borrowing responsibly and making timely payments on your debts. Stay informed and be proactive in managing your finances to ensure a brighter financial future.