Debt collection companies purchase debt for pennies on the dollar from companies like hospitals and credit card companies, these companies then write off the debt as a loss on their taxes. The debt collection companies slowly offer to settle with the person in decreasing dollar amounts until it gets to their break even. Then they either sell to another company and the process starts all over again or they sue the person for the total amount they originally owed. Most people would settle a $10,000 loan for $250 if that offer was made to them instead of a debt collection company. The original company is made just as whole as they would have been from the transaction with the debt collection company and the person who owes the debt doesn't have to worry about being hounded by collectors.
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