Understanding the Debt Collection and Legal Process

March 29, 2024



Your Rights in the World of Debt Collection

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.



Dealing with debt collectors can be one of the most stressful experiences, especially when you're unsure about your rights and the best way to navigate the situation.

Our comprehensive guide clarifies the debt collection and legal process, offering you the knowledge and tools to handle debt collection with confidence. From understanding the initial stages of debt collection to exploring your legal protections and rights, we empower you to manage this challenging scenario effectively.

Learn how to engage with debt collectors, leverage consumer protection laws to your advantage, and explore viable options like debt settlement and counseling to find a path forward. Armed with this information, you'll be better prepared to protect your financial well-being and peace of mind.

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What is Debt Collection?

Before we dive into the process, let's start with a quick overview of what debt collection is and who's involved:

• Debt collectors are companies or individuals that collect unpaid bills owed to another party. They use letters, calls, texts, and other methods to demand payment from the consumer.
• Collection agencies are companies that creditors hire to collect debts on their behalf. Creditors pay these third-party agencies fees or commissions based on how much they collect.
• Debt buyers purchase unpaid debts from creditors or other debt buyers, usually for pennies on the dollar. They attempt to collect the full amount themselves and keep the profits.
• Original creditors are the businesses you originally owed money to, such as banks, credit card companies, utilities, medical providers, etc. They sometimes collect debts in-house before assigning accounts to collectors.

Debt collection most commonly occurs when you fall behind on payments like credit cards, medical bills, utilities, auto loans, and more. After a certain period of non-payment, creditors will stop trying to collect debts themselves and assign or sell the debt to a debt collection lawyer or agency.

The collections process provides creditors a way to recover some money from debts that would otherwise be a total loss. However, collectors must follow fair practices and consumers have rights under federal and state laws.

The Debt Collection Process

In-House Collections

When you initially fall behind on payments past due debts, the original creditor will attempt to collect on the debt themselves. The creditor's internal team will send letters and call you directly. This early stage of delinquency usually lasts about 6 months.

Collecting at this stage benefits the creditor because no third parties are involved yet. They have an incentive to work with you directly to find a resolution, preserve your relationship as a customer, and avoid selling the debt.

Third-Party Collections

If the creditor can't recover the debt, the bank account will be turned over to a professional debt collection agency. These third-party agencies take over contacting the debtor to try further contact them to recover money owed.

The original creditor still owns the debt and will receive a percentage of any amounts collected. The agency earns a fee or commission for its services rendered.

A third debt collector may also be more aggressive than the original creditor in pursuing payment. However, they must still follow consumer protection laws regarding what tactics they can use.

Debt Sales

After 6-12 months in third-party collections without payment, the creditor will likely charge off and sell the debt rather than continue paying agency fees. Charge-off means the creditor writes the debt off their books as a loss, though it can still be collected.

The debt gets sold to a debt buyer, usually for pennies on the dollar. This serves the relationship with the original creditor entirely. The debt buyer or company now owns the debt and will attempt to collect the full amount themselves by any legal means possible.

Debt buyers are often more aggressive because they pay so little for the debt but try to recover the full amount paid. However, consumer protections still apply. This cycle will repeat as the debt gets resold to other buyers, sometimes several times. The older the debt, the more it gets discounted. Debt can potentially be bought and sold indefinitely over the years.

Communications from Collectors

As your debt passes through the different stages of delinquency, you'll be contacted by phone, mail, email, text message, and possibly even social media.

Debt Collector Phone Calls

Once your bank account enters collections, expect to receive an influx of phone calls from collectors demanding payment. Calls will become more frequent and aggressive as time goes on. Collectors may call your home, work, and even personal cell phone numbers to try to reach you.

Some useful facts:

• Collectors are allowed to contact third parties to verify your contact information, but cannot discuss the debt.
• Calls are limited to between 8 am - 9 pm in your local time zone.
• Collectors must state they are making a call to collect a debt.
• Any request to stop calling must be honored. Sending a cease and desist letter will legally require them to stop.

Letters from Debt Collectors

Along with phone calls, collectors will send letters to your home address. Letters reiterate details about the debt and insist on payment.

The first letter you receive must include the "validation notice."

This first written notice provides key information like the total amount owed, creditor name, and instructions for disputing the debt. Save this notice along with any other letters you receive. They may provide evidence if you have a dispute letter in a legal dispute.

Email and Text Messages

Collectors can also use email, text messages, telephone calls, and social media to contact debtors. Strict FCC regulations make auto-dialed calls to cell phones illegal. However, collectors still find ways to obtain mobile numbers for SMS and apps.

Email provides a written record of personal or financial information that you can keep for your records. Be cautious about providing info that could identify your accounts.

In-Person Visits

Extremely rarely, collectors may attempt to visit your home or workplace if they cannot reach you otherwise. A personal visit is a legal action but very uncommon. You are under no obligation to discuss your debt or let them into your home.

Document every communication you have with collectors in a debt collection log. This provides evidence that debt collectors use illegal tactics or wrongly report debts.

Consumer Rights and Protections

Federal and state laws provide important protections against harassment or illegal practices from debt collectors. Understanding your rights is crucial when dealing with debt collections.

The Fair Debt Collection Practices Act (FDCPA)

This federal law regulates the behavior of third-party debt collectors and provides consumers rights including:

• Prohibiting calls before 8 a.m. or after 9 p.m. in your time zone.
• Requiring collectors to honor written requests to cease contact.
• Forbidding threats of violence, obscene language, repeated harassment, or making false statements.
• Prohibiting contact with third parties about your debt (except to verify location info).
• Requiring collectors to properly validate and verify debts when requested.

The law also gives consumers recourse if collectors violate these rules. You can report them to a government agency, the FTC, or CFPB, or sue for damages under the FDCPA. For more detailed information on how the CFPB's debt collection rule impacts you, check out this article.

State Laws

Many states add additional laws regulating debt collection practices on top of the FDCPA. For example, some states prohibit wage garnishment or set statutes of limitations on debt lawsuits. Research what protections apply in your state.

Statute of Limitations

This law sets time limits on how long collectors can sue you to recover debts. The period ranges from 3-6 years depending on your state. Check the statutes where you live.

If your debt collector calling surpasses the time limit, it is "time-barred" meaning collectors can still contact you seeking payment but cannot sue. Be sure to verify the date of your debt collector calling the last payment and the statute expiration.

Bankruptcy

Declaring bankruptcy stops all collection activities and wipes many types of debt completely away. Chapter 7 bankruptcy discharges unsecured debts like credit cards. Chapter 13 allows you to restructure debts into a 3-5-year payment plan. Bankruptcy stays on your credit report for 7-10 years depending on the chapter.

Options for Dealing with Debt Collectors

Pay in Full

The ideal scenario for collecting debts is to pay off the debt completely, known as "pay for delete." Get this agreement in writing first. Payment of past due debts in full requires having the lump sum amount available. Debt collectors often accept less than the full amount originally owed.

Payment Plan

If unable to pay in full, you and the debt collector may be able to set up a payment plan, allowing you to pay off the debt in reasonable amounts and affordable installments over time. Debt collectors usually prefer partial payment over nothing at all. Get any payment plan agreed to in writing before sending money.

Debt Settlement

This involves negotiating to pay the collector in a lump sum that is less than the full amount owed, typically 30-50% of the total debt. The collector agrees to forgive the remaining amount after payment. Debt settlement allows resolving debt for less than five days without paying in full.

Credit Counseling

Non-profit credit counseling provides guidance on managing debt through methods like debt management plans (DMPs). DMPs consolidate debts into one payment and negotiate waivers of late fees. Counselors also provide budgeting assistance.

Bankruptcy

As a last resort, filing for bankruptcy stops collections and provides legal relief from many types of debts. However, it damages credit scores for 7-10 years. Chapter 7 bankruptcy discharges unsecured debts; Chapter 13 allows restructuring of debts under court supervision.

If you choose to make payments or settle debts, get all agreements in writing first and ask for removal from credit reports after paying. Be wary of collectors who refuse to put agreements in writing.

Collections and Your Credit

Having debts in collections can significantly impact your credit standing and scores on how collections interact with your credit reports and profiles.

Here are some key facts

• Unpaid debts get reported to the three major credit bureaus (Equifax, TransUnion, and Experian). The original creditor reports the initial delinquency.
• Debt collectors may also report collections accounts to the credit bureaus. Paid or settled collections must be reported as such.
• Collection accounts stay on your credit reports for up to 7 years from the date of the first delinquency.
• Debt in collections severely damages credit scores calculated by FICO and VantageScore models, since payment history is a major factor.
• Multiple collections accounts show lenders you are a high-risk borrower and make it harder to qualify for loans, credit cards, mortgages, etc.
• Settling or paying off collections won't remove items from your credit reports, but can raise scores over time as the accounts age.
• You can dispute incorrect or invalid collection trade lines with the credit bureaus to have them removed. Provide evidence that the debt is inaccurate, settled, expired, does not belong to you, etc.
• Be cautious about agreeing to "pay for deletion" deals, where the collector claims the item will get removed upon payment. This is not always guaranteed. Get promises in writing first.

Maintaining good credit standing requires keeping accounts current, disputing errors promptly, and letting negative items fade over time. Collections damage can be repaired but takes patience for credit scores to rebound. Be wary of any promises of fast credit fixes.

FAQs

Conclusion

Dealing with debt collectors can be an intimidating and stressful experience if you don't understand the process and consumer protections. However, arming yourself with knowledge helps take control of the situation. You have rights under federal and state laws.

Collectors must follow fair practices. Don't let them harass or pressure you. Communicate professionally in writing. Dispute inaccurate debts promptly. Document all interactions. Research your resolution options fully and negotiate favorable repayment terms.

If collectors cross the line, file official complaints and consult lawyers about suing for damages. Rebuilding credit takes patience. Let negative items fade over time while keeping current accounts in good standing. With perseverance and diligence, you can recover from debt struggles.

While debt collection calls are unpleasant, handling them correctly can alleviate the stress. Put your rights to work, act professionally, and take control of your finances and credit. With perseverance, you can recover from debt struggles and rebuild your credit standing.

If you are struggling with overwhelming debt and want to explore your relief options, Pacific Debt Relief offers a free consultation to assess your financial situation. Our debt specialists can provide objective guidance to help find the right debt relief solution.

*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.