It’s easy to get behind on paying the monthly bills. The economy may have slowed your ability to generate income, your investments may have dwindled, or perhaps you had an unexpected home repair or medical emergency that ate your savings.
It only takes a few missed payments before debt collectors start to call, demanding money. One alternative that consumers should consider is finding a debt consolidation plan that could help satisfy debts.
However, when creditors do not receive payment for a period of months, they often find another company or an affiliate company to collect the past-due amount. Sometimes a collection agency will agree to collect the debt in exchange for a fee or for a percentage of the money collected as payment. Other times a third party will purchase your debt from the creditor for less than you owe and then attempt to collect the full amount.
Debt collectors, as the name suggests, are in the business of finding people who haven’t paid their bills and convincing them to make good on those debts.
Miss a few payments on credit cards, student loans, medical bills, mortgage, cell phone service or an upside-down car loan and there is a very good chance you will hear from a debt collector demanding money, Actually, you likely will hear from them several times, either by phone or through the mail, because when you pay, they get paid.
Debt collection is a $13 billion industry with more than 40,000 workers chasing down those who have fallen behind on their bills. One out of three American adults – 77 million people — have credit files that show debts in collection, according to the Consumer Finance Protection Bureau (CFPB).
The CFPB says the average debt is $5,178 and trends suggest that number will get higher. Credit card debt is at $918 billion in October 2015 after dropping as low as $840 billion in 2010. The surge is even greater in the student loan industry, where the delinquency rate is 27.3 percent on all loans in repayment, according to the St. Louis Federal Reserve and total debt is $1.3 trillion.
That’s a lot of uncollected money and a good reason over 6,000 companies are in the debt collection business.
Creditors vs. Debt Collectors
Consumers often use the terms “creditor” and “debt collector” interchangeably, but they are two separate entities.
Creditors are defined as businesses or individuals who are owed money. They are the company that extends credit or a loan with the expectation they will be paid back. When creditors do not receive payment over a period of time, at least 90 days in most cases, they often hire another company to chase the past due amount. The company they hire is a debt collection agency.
Debt collection agencies pursue the debt and receive a percentage of the amount they collect. That arrangement accounted for about half ($6.6 billion) of the industry’s revenue in 2014.
The other popular move is for the collection agency to purchase the debt from the creditor and try to collect the entire amount, or some profitable portion, themselves. The Federal Trade Commission’s 2013 survey showed collection agencies paid the original creditor an average of just four cents on the dollar for debt. They could sell that debt again to another collection agency.
The constant sale and re-sale of debts has created doubt about whether the information sold is accurate. The debt is sometimes re-sold so many times that parts of debts already may been settled and information about the source and amount left is questionable.
Although some debt collectors are cordial, others resort to harassing phone calls, threats and obscene language to intimidate consumers and make them pay immediately. This brings even more stress to what already is a difficult time. It’s important to know your rights as a consumer. You should be familiar with the debt collection process, as well as how collectors can garnish wages. It is important to understand the collection practices that debt collectors don’t want you to know so you can be prepared to fight back.
Debt Collection Process
First and foremost, you will have to answer directly to your creditor. For about half a year after your bill becomes overdue, a collector within the lending company will contact you regarding the debt. If you do not take care of the debt during this period, your creditor will likely sell the debt to a third-party debt collector. If this happens, you’ll owe the collection agency directly rather than owing your original creditor.
Owing a debt collector tends to complicate the issue; more laws come into play, and debt collectors tend to be more aggressive in their collection practices. When possible, it’s advised that you attempt to settle your debts before they are handed off to collection agencies.
As soon as a collection agency begins contacting you about a debt, verify the debt before you take any other actions. If you believe the debt is for a different amount, or if you believe you do not owe the debt at all, the process of debt collection arbitration can help you clear the air.
Within five days of your first contact from a collection agency, the collector must send you a written notice that lists the amount owed and the name of the creditor to whom money is owed. If the information is incorrect, notify the agency immediately and do not pay any amount.
Debt Collection Arbitration
If debt collectors still refuse to stop calling you, you may need to begin debt collection arbitration. This is a means of settling debt disputes fairly by using a third-party arbitrator.
Collect as much evidence as you can to show that you do not owe the debt in question. This may include items like receipts, contracts and account summaries. The arbitrator will listen to your case and to the collection agency’s case, reviewing all documentation regarding the loan in question.
After hearing both sides, the arbitrator will decide on a course of action. If he or she deems that you owe the debt, the debt collector or creditor will bring the decision to a court for confirmation. The court could order you to pay the debt and may issue a garnishment order against you.
If your account is severely past due, your creditor or debt collector may request that a judge issue a garnishment order against you. With this, the company can garnish, or collect, owed money directly from any income such as wages, bonuses or pensions. This means a share of your earnings will go toward repaying your debt until the full amount is satisfied.
Creditors can only garnish a certain amount of your earned income, ensuring that you are left with enough of your paycheck to cover basic living expenses. There are also certain types of income, such as child support, that are immune to garnishment.
Collection agencies tend to be aggressive during every step of the collection process. Some commonly employed collection tactics such as harassment are illegal. Therefore, it’s vital to review your rights, which vary by state, so you are able to recognize and report when a collection agent is breaking the law.
Fair Debt Collection Practices Act
The nation’s consumer protection agency, the Federal Trade Commission, enforces the Fair Debt Collection Practices Act, which bars debt collectors from using abusive, unfair or deceptive practices. The act covers personal, family and household debts, including money owed for car loans, medical bills, credit cards and mortgages.
Here are some actions prohibited by law:
- False statements
- Unfair action
You also have a right to privacy, so when you receive the first phone call, tell the collection agency you want all future contact in writing. Follow up your request in writing and say you want to be the only person contacted concerning the debt, as some collectors will attempt to contact employers, friends, neighbors and family members.
Be sure to make a copy of the letter and send it by certified mail. Pay for a “return receipt” so you have documentation that the collector received it.
Stop Collection Agency Harassment
If a debt collector harasses you and does not stop illegal actions upon written request, you have the right to fight back. You can file a lawsuit in state court or federal court within a year after when the law was broken. If you can prove the violation and win, the judge can make the collector pay you for damages you suffered, as well as your attorney fees and court costs. It’s important to remember the debt will not go away without payment, even if the debt collector violated federal law.
Members of the military should contact their local Judge Advocate General’s office if they are contacted by a collector. Another federal law, the Service Members Civil Relief Act, provides protections for those who are in the military and whose financial life is affected by service.
Since many states have their own debt collection laws, it’s important to contact your state Attorney General’s office to help you determine the rights you have. You also can report any issues with a debt collector to the Federal Trade Commission.