What Is Debt Collection?

Understanding the Process and Law of Debt CollectionsThe picture that many people have in mind when they think about the stereotypical debt collector is a hard-hearted scoundrel of melodrama infamy, threatening to throw widows and orphans into the street because the rent is overdue.

While it’s tempting to portray these individuals as dastardly villains out to wreck lives — and historically some of their behaviors have been less than admirable — it’s important to remember one fact: Nobody is forced to borrow money. Ultimately, if you owe a debt, it’s because you chose to borrow money. Your lender made that loan, or offered the credit line, contingent upon your promise to pay it back.

Your creditors do have a right to their money, and a debt collector is simply trying to reclaim what is legally and ethically owed by you.

Debt Collection Process

Generally, there are three phases to the debt collection process:
  1. For the first six months of your delinquency, you usually will deal with your creditor’s internal collector, which is sometimes referred to as a first-party agency (you, the debtor, are the second party). This may be an ideal time to try and settle your debt, since no middleman is involved and your lender still has an incentive to maintain a positive relationship with you.
  2. Once your lender has decided that you aren’t going to repay your debt, it will be assigned to an outside organization, sometimes known as a third-party agency. At this point, the debt is still owned by, and owed to, the original creditor. If the third-party agency is successful in recovering all or part of the debt, it will earn a commission from your creditor, which can either be in the form of a fee, or a percentage of the total amount owed.
  3. In the third phase of the process, your original creditor writes off your debt and sells it — often for pennies on the dollar — to an outside collection agency, sometimes known as a debt buyer. Your creditor is no longer involved. The collection agency is still trying to recoup as much of the debt as it can, in order to turn a profit on its purchase.

In recent years, creditors have been turning over more of their delinquent accounts to debt-collection law firms, rather than to traditional bill collectors. The idea is that communication from a lawyer makes a greater impression, thereby increasing the possibility of repayment.

Initial Contact from Debt Collectors

Debt collectors are permitted to contact you by every communication system available – phone, letters, email or text message – but there are rules they must follow or they are in violation of the Fair Debt Collection Practices Act (FDCPA). Those rules include:

  • They must identify themselves as a debt collection agency and give their name and the address for the collection agency.
  • They must tell you the name of the creditor (company or person you owe), the amount you owe and how you can dispute the debt or seek verification of the debt.
  • If the debt collector does not provide verification information on the first communication with you, he must send written notice with that information within five days of the initial contact.

Ask a debt collector as many questions as you can during the initial contact and avoid saying anything that could be interpreted as admitting you owe the debt.

Debt Collection Laws

Although collectors are legally entitled to attempt to collect all owed debts, they are restricted in the methods they can employ by the Fair Debt Collection Practices Act. The law passed Congress in 1977 as an amendment to the Consumer Credit Protection Act of 1968.

The FDCPA:
  • Prohibits a collection agency from discussing your debt with your family, friends, neighbors or employer.
  • Limits the times of day collectors can call you.
  • Prohibits the use of slurs, obscenities, insults or threats.
  • Provides remedies for consumers who wish to stop collection agencies from all contact.
  • Requires collectors to verify all debts and end collection procedures if verification is not forthcoming.

While the original creditors are not covered by the provisions of the act, all third-party bill collectors and lawyers who are regularly engaged in the collection of debts are covered. In addition, many states have statutes that regulate the

practices of bill collection agencies, with some requiring them to be licensed, registered or bonded.

A majority of U.S. collection agencies — approximately 3,200 of them — belong to ACA International, the world’s largest nonprofit trade group representing collection agencies, creditors, debt buyers, collection attorneys and other industry service providers. The ACA requires its members to abide by all laws and regulations, as well as its own codes of ethics and operations.

The ACA requires its members to “treat consumers with consideration and respect” and “communicate with consumers with honesty and integrity.” It also restricts collectors from engaging in “dishonorable, unethical or unprofessional conduct … likely to deceive, defraud, or harm a consumer.”

Legal Action vs. Debt Collectors

If a debt collection agency has violated your rights under the FDCPA through repeated contact, abuse, threats, misleading information or false representation, you can sue them in state court.

The burden of proof is on you, but if the judge rules in your favor, you can be awarded $1,000 in statutory damages plus attorney’s fees. If you take this route, it is best to hire an attorney to represent you. If you take the case to state court, you must do so within one calendar year from the date of the violation.

If you want to handle the matter yourself, you can sue in small claims courts. The process is faster, but compensation for damages usually is limited.

Many disputes with debt collectors wind up in arbitration hearings. Businesses, especially credit card and cell phone companies, have clauses in contracts with consumers that say disputes must be settled in arbitration.

If you are uncertain whether your rights have been violated, you can contact the Federal Trade Commission (FTC) or the Consumer Financial Protection Bureau (CFPB) with questions about the situation. You also can file complaints with the FTC, CFPB or your local state attorney’s office.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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