Debt collection history goes back as far as the history of debt. The earliest record of commercial debt collection comes from ancient Babylon—a society that protected debtors’ rights but also allowed creditors to recoup delinquent accounts.
The Hebrew Old Testament also contains information on debt, specifying that creditors were not allowed to charge interest on debts. If a debtor failed to make payments despite the lack of interest they had to work for their creditor as a slave until the value of the debt had been satisfied.
In Colonial America, creditors used a writ of attachment to ensure repayment of debts. A writ of attachment was a legal document that stated the amount of the debt and required the debtor to secure it with their property. If the debtor did not have enough property to cover the debt, his body was used as security. Such debtors often ended up in debtors prison, where they were required to provide their own food and clothing. Unable to afford these provisions, many debtors froze or starved to death.
As harsh as these punishments may seem, they were often not enough to encourage debtors to pay their loans on time. Debtors could avoid a writ of attachment by remaining in their homes, in which you were exempt from being served. Many debtors stayed in their homes for years to avoid paying their debts. Others fled west, settling in Kentucky and other states with minimal law enforcement. Even when creditors did manage to take a debtor to court, they often failed to recoup their money.
The failure of debtors’ prisons to recover most debts led lenders to rely increasingly on secured loans during the 19th and early 20th centuries. As a result of the industrial revolution, ever larger numbers of Americans owned property, creating an expanding market for secured loans. Fearing the loss of their investments, creditors would often foreclose aggressively on wayward borrowers, providing little recourse to those who fell on hard times.
The limits of aggressive foreclosure became apparent during the Great Depression when an unprecedented number of Americans defaulted on their debts. Banks foreclosed on an enormous number of houses, but because the economy was in shambles, they had no way to sell or rent these properties. Meanwhile, aggressive foreclosure had given the banks a bad reputation, making even those who could afford it unwilling to take out loans.
Modern collection agencies are relatively recent in the history of debt collection, arising in the 1980s during the savings and loan crisis. Financial experts realized that they could still recoup their losses by making debtors pay a portion of the debts when they could not pay in full. Collection agencies began purchasing delinquent accounts at a fraction of their original value, negotiating with debtors, and collecting reduced payments. Debt collection attorneys work with businesses or debt collection agencies to help recover financial losses.