Your One Stop Resource for Saving Money.
Collections Agencies, Collections Laws and Your State's Statute of Limitations - The Bills.com Blog
Bills.com Blog > Debthelp Questions > Collection Agency, Collections Laws & Statute of Limitations
Collections Agencies, Collections Laws and Your State's Statute of Limitations
Wednesday, Jun 24, 2009
Question: What is my liability when a collection agent buys my debt?
Answer: First, you need to learn about the collections process. Next, you need to learn if you have any legal means to disclaim responsibility for the debt. Third, you need to determine if the statute of limitations on collecting the debt has passed. Finally, if you are responsible for the debt, you need to consider your options for resolving the debt. Let us look at each of these issues separately.Collections process
To the debtor, the debt they owe is a liability. However, to the creditor, the debt is an asset. Think like an accountant. If a debt account is an asset, an asset can be bought or sold. When a debtor is making regular complete payments, the value of the account is its face value. However, when a debtor starts to slip behind in their payments, the value drops.
When a debtor stops paying on a debt, and the number of days since the most recent payment reaches 120 days, the account is no longer considered current, and the creditor is required to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease. The write-off date has almost nothing to do with the statute of limitations for debts, which we will discuss later.
At the write-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest.
Collection agents can buy a fully documented account, which includes all of the invoices and records of the original creditor's collection efforts. Or, the collection agent can buy a "bare" account with little documentation. A fully documented account is worth a lot more than a bare account, as we will see later.
A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor's employer, file charges with the local sheriff, or say they will park a truck in front of the debtor's house with a sign that reads "Bad Debt" on it. All of these tactics are illegal under the Fair Debt Collection Practices Act . Start here to learn the rights consumers have in collections under the Fair Debt Collection Practices Act.
A creditor -- a debt collector that owns a debt account is a creditor -- has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear." If you ever receive a summons you should do as it instructs! In the hearing, the judge will decide if the creditor should be allowed to collect the debt, and if the debtor
fails to appear, the judge has no choice but to decide on behalf of the creditor.
A judgment is a declaration by a court that the creditor has the right to ask for a wage garnishment, a levy on the debtor's bank accounts, and a lien on the debtor's property. Which of these tools the creditor will use depends on the circumstances. See Attorney Collections and Garnishing Wages to learn more background information on wage garnishment.
Disclaiming responsibility for the debt
If a collector demands payment of a debt an individual does not owe, or more than they owe, they can dispute the debt in writing. The formal terms are "debt verification" or "debt validation." Within five days of first contacting the consumer, debt collectors are required to notify the individual of his or her right to validate the debt. Consumers are required to write to request verification within 30 days of when they are first informed of the debt.
Here is where the question about a fully documented or bare account comes into play. If the debt collector has a bare account, then the collector has no means to validate the debt. Without validation, the account is noncollectable if the debtor asks for the validation and does not receive it. That is why is is wise for a debtor to ask for a debt validation when a debt collector attempt to collect on an old debt -- the chances on the debt account still containing the full documentation diminishes with each passing day and with each debt collector who handles the file.
To see a sample debt validation letter, go to the Bills.com debt self-help center .
Statute of limitations
A statute of limitations (SOL) is the time period during which a creditor can take legal action (i.e., sue the debtor) to enforce a debt. Each state has defined its own statutes of limitations, and they vary significantly.
For example, in California, creditors have four years to sue a debtor to enforce a debt, while in Rhode Island they have 10 years. To learn more about statutes of limitations for the collection of debts, see the Bills.com Collection Laws and Statute of Limitations page to get some basic information about the rights in each state. Debtors should consult with an attorney licensed to practice in their state to discuss the specifics of each situation and determine if the SOL for the creditor to sue has expired.
If a state's SOL for the collection of debts has expired, the likelihood of the creditor attempting to sue the debtor to enforce the debt is much less. While the passing
A judgment is a declaration by a court that the creditor has the right to ask for a wage garnishment, a levy on the debtor's bank accounts, and a lien on the debtor's property. Which of these tools the creditor will use depends on the circumstances. See Attorney Collections and Garnishing Wages to learn more background information on wage garnishment.
Disclaiming responsibility for the debt
If a collector demands payment of a debt an individual does not owe, or more than they owe, they can dispute the debt in writing. The formal terms are "debt verification" or "debt validation." Within five days of first contacting the consumer, debt collectors are required to notify the individual of his or her right to validate the debt. Consumers are required to write to request verification within 30 days of when they are first informed of the debt.
Here is where the question about a fully documented or bare account comes into play. If the debt collector has a bare account, then the collector has no means to validate the debt. Without validation, the account is noncollectable if the debtor asks for the validation and does not receive it. That is why is is wise for a debtor to ask for a debt validation when a debt collector attempt to collect on an old debt -- the chances on the debt account still containing the full documentation diminishes with each passing day and with each debt collector who handles the file.
To see a sample debt validation letter, go to the Bills.com debt self-help center .
Statute of limitations
A statute of limitations (SOL) is the time period during which a creditor can take legal action (i.e., sue the debtor) to enforce a debt. Each state has defined its own statutes of limitations, and they vary significantly.
For example, in California, creditors have four years to sue a debtor to enforce a debt, while in Rhode Island they have 10 years. To learn more about statutes of limitations for the collection of debts, see the Bills.com Collection Laws and Statute of Limitations page to get some basic information about the rights in each state. Debtors should consult with an attorney licensed to practice in their state to discuss the specifics of each situation and determine if the SOL for the creditor to sue has expired.
If a state's SOL for the collection of debts has expired, the likelihood of the creditor attempting to sue the debtor to enforce the debt is much less. While the passing
of the SOL does not mean that a creditor cannot file a lawsuit, if one is filed the debtor has an absolute defense against the lawsuit. If the debtor responds to the suit stating that the SOL has expired, the judge should dismiss the case. In addition, if the court believes that the creditor filed suit despite knowing that the SOL had expired, the court may sanction the creditor for its actions.
In most states, the SOL begins running from the date of last payment on the account. This means that if the debtor paid just a few dollars to a collector a couple of years ago, the running SOL for that debt could have been reset. Also, keep in mind that the passage of the SOL does not forbid a creditor from calling to collect on the debt -- it simply provides an absolute defense in court if the creditor files suit.
Options for resolving the debt
Assuming the debt is validated and the statute of limitations has not passed, there are five options for resolving a debt: 1) pay the debt outright, 2) debt negotiation and settlement, 3) debt consolidation, 4) bankruptcy, 5) default.
Debt negotiation and settlement is the process of negotiating with creditors to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance. If the only other option is bankruptcy, creditors are willing to negotiate to ensure that they get something rather than nothing.
Debt consolidation , by contrast, is consolidating debts to reduce high interest rates and pay off delinquent payments with a loan or low-interest credit card. There is no debt balance reduction. The debt is simply rolled into a loan or credit card that has a lower interest rate. It will ultimately save money in the long run but in the beginning, the debtor is still stuck with the same balance.
Bankruptcy is an option for some debtors, but going this route should be taken only with great care and deliberation, and after consulting an attorney in the state where the debtor's reside.
Finally, a debtor can default -- in other words, do nothing. This is the worst option, and makes the debtor a passive observer rather than the person in charge. As discussed above, doing nothing may lead to wage garnishment, additional charges added to your debt, and a reduction in the debtor's income the debtor cannot control.
To see additional discussion of debt resolution, read What Are My Debt Consolidation Options?
I hope this information helps you Find. Learn & Save.
Best,
Bill
www.bills.com/blog/
In most states, the SOL begins running from the date of last payment on the account. This means that if the debtor paid just a few dollars to a collector a couple of years ago, the running SOL for that debt could have been reset. Also, keep in mind that the passage of the SOL does not forbid a creditor from calling to collect on the debt -- it simply provides an absolute defense in court if the creditor files suit.
Options for resolving the debt
Assuming the debt is validated and the statute of limitations has not passed, there are five options for resolving a debt: 1) pay the debt outright, 2) debt negotiation and settlement, 3) debt consolidation, 4) bankruptcy, 5) default.
Debt negotiation and settlement is the process of negotiating with creditors to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance. If the only other option is bankruptcy, creditors are willing to negotiate to ensure that they get something rather than nothing.
Debt consolidation , by contrast, is consolidating debts to reduce high interest rates and pay off delinquent payments with a loan or low-interest credit card. There is no debt balance reduction. The debt is simply rolled into a loan or credit card that has a lower interest rate. It will ultimately save money in the long run but in the beginning, the debtor is still stuck with the same balance.
Bankruptcy is an option for some debtors, but going this route should be taken only with great care and deliberation, and after consulting an attorney in the state where the debtor's reside.
Finally, a debtor can default -- in other words, do nothing. This is the worst option, and makes the debtor a passive observer rather than the person in charge. As discussed above, doing nothing may lead to wage garnishment, additional charges added to your debt, and a reduction in the debtor's income the debtor cannot control.
To see additional discussion of debt resolution, read What Are My Debt Consolidation Options?
I hope this information helps you Find. Learn & Save.
Best,
Bill
www.bills.com/blog/
Also, make sure to get a free financial health check-up with Bills IQ!
User Comments
Submit questions/comments about this post:
Bill has answered all sorts of questions and has been able to provide those in need of financial guidance with helpful and valuable advice and information on their specific financial area of interest. If you need specific guidance on any of the above mentioned financial areas, feel free to Ask Bill your financial questions and get better informed. Also, make sure to get a free financial health check-up with Bills IQ!
Information provided by Bills.com is for general informational purposes only and is not be
construed as legal, financial, bankruptcy, tax or other professional advice. Should you
require more detailed information or specific professional advice tailored to your situation you
should consult an attorney, financial planner or tax advisor.
While we believe all information provided by Bills.com to be accurate as of the date of its posting, we cannot ensure its accuracy. Use of this site and any information contained on or provided through this site is provided without any representations, warranties or guarantees. Bills.com is not responsible or liable for any decisions or actions anyone may take based on the information provided. Please see Terms of Use.
While we believe all information provided by Bills.com to be accurate as of the date of its posting, we cannot ensure its accuracy. Use of this site and any information contained on or provided through this site is provided without any representations, warranties or guarantees. Bills.com is not responsible or liable for any decisions or actions anyone may take based on the information provided. Please see Terms of Use.
© 2006 - 2009Bills.com LLC. All Rights Reserved.
1. Posted by Bill Brosnick on Tuesday 30th June 2009 15:10
How is the SOL affected if you move from one state to another during the course of delinquency? I have an old debt of 8 years that began in TN and now I live in AL.
2. Posted by Mark Cappel on Wednesday 1st July 2009 09:26
Generally speaking, the SOL starts to run at the debtor's last payment. TN has a six-year SOL, and Alabama has a three-year, so if your last payment was eight years ago it expired in both states. Remember that a SOL does not prevent a creditor from attempting to collect the debt. However, the expiration of the SOL is a defense that, if raised in a timely manner, bars judgment. Keep in mind the first two words of my reply. An Alabama attorney, armed with all of your facts and knowledge of Alabama law, will give you a specific answer.