July 26, 2013
Dealing with a debt collector? Tips for borrowers
Debt collection can be an unpleasant business, but it's a big one.
The industry generates $12.2 billion in revenue for the roughly 4,500 firms chasing down borrowers who owe money on credit cards, auto loans and other accounts, according to figures from the Consumer Financial Protection Bureau.
Laws on the books and recent initiatives by the CFPB, a federal government consumer watchdog agency, offer borrowers ways to push back when firms call them multiple times a day or continue collection efforts without verifying that the debt is owed, among other illegal tactics.
Last week, the CFPB expanded its consumer complaint system to include gripes over debt collection related to any consumer debt, including auto loans, medical bills and student loans. The collection firms are required to respond to such complaints within 15 days.
Here are six tips for dealing with debt collection firms:
1. Understand your rights
Debt collection agencies typically buy accounts that have gone unpaid from credit card issuers and other lenders for pennies on the dollar. Recovering even a small portion of what's owed on an account can be profitable. That's one reason firms have an incentive to go after borrowers over debt that's several years past due.
How they go about doing so, however, is restricted by the Fair Debt Collection Practices Act, Consumer Financial Protection Act and other laws.
The laws don't resolve the underlying issue of whether a consumer owes a debt. They just address the proper conduct from collection firms.
"So many consumers are intimidated about the process and don't know their rights and don't know what to do," says Laura Udis, senior financial services advocate at the Consumer Federation of America, a research, education and advocacy organization.
Generally, collection firms are forbidden under the law from using unfair, deceptive or abusive tactics. That can include practices such as phone calls at all hours of the day or night, or using threats of violence or arrest.
For a broader list of debt collection agency no-nos: www.Consumer.ftc.gov/articles/0149-debt-collection .
2. File a complaint
Borrowers who believe they're being mistreated have several avenues to complain, including the Federal Trade Commission and their state's attorney general's office. Many states have their own debt collection laws that may differ from federal laws.
Another option is to complain directly to the debt collection company.
The law enables borrowers to ask a debt collector to cease contacting them. The FTC recommends sending the request via certified mail. Once the firm receives the letter, its representatives may only contact you again to inform you of a specific action being taken against you, like a lawsuit.
The CFPB has five sample letters that can be used as templates for raising a variety of issues with debt collection firms, including disputing the debt, or asking that they only communicate with your attorney.
You can find the letters and also file complaints with the CFPB on its website: www.Consumerfinance.gov/
3. Don't ignore the situation
Many borrowers often make matters worse by ignoring overdue payment notices or collection agency letters.
There is a window of time after the initial collection notice during which borrowers can exercise certain rights, such as asking for the name and address of the original creditor, as well as proof that they owe money.
To do so, borrowers must make the request in writing within 30 days of receiving the collection notice.
A bigger danger is missing a notice that the collection firm has sued you to recover the debt, says Udis. That opens the door for a court to issue a default judgment against you, which could lead to your wages being garnished and other penalties.
"You'll see attorneys in court with maybe 100 or more lawsuits at a time and no consumers showing up to defend," she says, "so they'll get default judgment after default judgment."
4. Realize that some debt may be too old to hurt your credit score
Unpaid loans may end up being bought and sold several times over the years by debt collectors. That can lead to collection attempts on accounts that have gone unpaid for many years.
When the statute of limitation expires on debts, collection agencies are no longer able to sue the borrower for payment. That doesn't stop collectors from trying to convince a borrower to pay up.
Setting aside the moral issue of meeting one's financial obligations, if the statute of limitations has expired on a debt, the borrower is, legally speaking, free to ignore the collection agency. But the claim can remain on your credit report after the statute of limitations for collecting the debt has expired. Such statutes vary from three to 15 years, depending on the state. Negative items remain on a credit report seven years; 10 years, if it's a bankruptcy.
A borrower should look up the statute of the state where they reside, as that's the one that would apply.
You can find a list here: www.Bankrate.com/finance/credit-cards/state-statutes-of-limitations-for-old-debts-1.aspx .
Statutes of limitations don't apply to child support payments, federal and state taxes, and federally guaranteed student loans.
5. Avoid debt-settlement programs
Experts advise against entering a debt-settlement program.
They are often run by for-profit companies that offer to negotiate a one-time payment that creditors can accept as a payoff in lieu of the total amount owed.
But some of those companies may suggest that borrowers stop paying creditors until they have accumulated enough money to make a settlement offer. That can lead to more interest and fees being tacked onto the bill — more money the borrower will have to pay should the creditor decline to a settlement.
And the debt-settlement firms often require that borrowers deposit money in an account for 36 months or more before all debts are settled, according to the FTC.
6. Get qualified help
A nonprofit credit counseling organization can connect you with an expert who can help assess your financial situation and develop a plan to manage your debt, as well as offer advice on how to best to deal with specific debt collection issues.
Keep in mind that credit counselors will typically charge a fee for their services.
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