Collections Agencies, Laws & State Statute of Limitations

What is my liability in a debt being bought by collection agency?

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Man with open envelope | Collection Agency, Collection Laws, Statutes of Limitation
Bill's Answer: Answered by Mark Cappel

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, or that the debt is forgiven. The write-off date has no legal significance, and 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 either assign or sell the debt to a collection agent. If the debt is assigned to a collection agent the collection agent will attempt to receive payment on the creditor’s behalf. If the collection agent buys the debt, it will do so at a discount from the face value. Typically, collection agents buy debt for 5 to 50 cents on the dollar. 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.

Quick Tip: Struggling with debt questions? Let the Debt Coach review your debts and give you your options to resolving these debts.

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 debt self-help center.

Statutes 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 defines its own statutes of limitations, and they vary significantly.

For example, in California and Texas, creditors have 4 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 resources Statute of Limitations Laws by State and How to Tell Which Statute of Limitations Applies to Your Situation to learn 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. Consult with a lawyer who has consumer law or civil litigation experience to learn how to respond to a lawsuit properly and in accordance with your state’s laws.

Wise Advice Most courts find it is a violation of the FDCPA for a collection agent to pursue a debt collection lawsuit against a consumer after the statute of limitation expired (Kimber v. Federal Financial Corp. 668 F.Supp. 1480 (1987)). Some collection agents still sue in hopes the consumer will not know this rule.

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 a 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.



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Comments (105)

Sh D.
Elma, WA  |  April 08, 2014
I have a truck that got repossed back in 2009 i tried contacting the collection agency back then to set up payments they would not accept anything under 1000.00 a month til the debt was settled obviously i could not afford that. I recently contacted the collection agency to yet again try to set up a payment plan to handle this debt they verbally agreed to 175.00 a month i requested that they send me something in writing stating how much i was paying and the amount i was paying off and i still have not recieved anything in the mail i do not feel comfortable just handing over money without having something in writing i have nothing protecting me is there a legal form i can send them to get them to send me a payment plan in writing? please help
April 10, 2014
I think your caution is prudent for two reasons:

First, has the clock on your state's statute of limitations run out? If so, you have no legal obligation to settle this debt.

Second, if the statute of limitations clock is still running, you are wise to insist on a contract. We don't have one that fits your situation precisely. Check out our Debt Settlement Offer Letter and adapt it for your use.
Traci E.
Gresham, OR  |  April 03, 2014
We are in the process of fixing some things we found on our credit report, and one of the problems has me confused. Most of the issues were debts that have been satisfied not showing they are, and we have been able to clear those up. The one that we aren't sure what to do with is a judgement with the county circuit court for a collection company (for medical bills). I went to the courthouse and looked at the file and it states the following: Plaintiff hereby exonerates and releases you of any and all claims arising out of that certain Writ of Continuing Garnishment served upon 10/19/10. So what does this mean? Is the debt satisfied and I just need to call the collection agency to have them notify the courts? Do we still owe but they stopped the garnishment? We are trying to clear this up for a future home mortgage, so any advice is appreciated. Thank you!
April 03, 2014
It would appear the judgment-creditor and your local court consider the judgment satisfied. If you paid-off the judgment, then research to find the date the judge signed the judgment.

It appears you reside in Oregon. On the Oregon Collection Laws page we see the statute of limitations for a judgment is 10 years.

Under the Fair Credit Reporting Act, a judgment may be reported on your credit reports for 7 years or your state's statute of limitations for judgments, whichever is longer. For Oregon residents, this means the judgment will appear on your credit reports for 10 years. At the end of 10 years, the judgment should fall off of your credit reports automatically.

You mentioned the date 10/19/10. If this is date the judge signed the judgment, the statute of limitations clock on this will run out in October 2020, at which time the judgment should be removed from your credit reports.

Make copies of the judgment release you saw. You will want to share a copy of the release with the lender's underwriting department to show the judgment is satisfied.
Chris E.
Irvine, CA  |  March 28, 2014
In 2008 I had a foreclosure. The second (heloc) was sold off to out of state (FL) debt collector Nov 2013. The collector contacted me via U.S. Mail, in Nov 2013. I responded that I wanted verification that validated their claims that I owed them money. In Dec 2013, they stated they would respond within 30 (plus additional 15 days). I never heard back from them. I contacted the credit agencies (Equifax, TransUnion, Experion) and asked them to remove/update the status on my record regarding this “outstanding” debt from debt collector. They responded with the updated status is still listed as “open” and the “past due” (which only goes as far back as Nov. 2013) claim is approximately 1/10 of the original balance. I am in a quandary of what to do. I have contacted the collection company. I have letters, which they never responded to the validity of this debt. The last payment I made with original lender was Dec 2010. Any suggestions as to how to deal with this? Do I continue to press the issue with collections and the credit reporting companies? Or do I wait a few month for SOL to run out?
April 18, 2014
My answer assumes the home loans were tied to a California property. One important point: I am confused by your statement, "The last payment I made with original lender was Dec 2010." I don't understand why you would have have made payments after the foreclosure, in light of California's anti-deficiency laws. My answer here assumes you stopped making any senior or junior loan payments at the time of foreclosure. Consult with a lawyer if my assumptions are incorrect, and disregard the rest of this answer.

There are or were two clocks running here. The first and most important is the California statute of limitations clock for the deficiency balances relating to the foreclosure. If the foreclosure took place in California in 2008, the statute of limitations have long since expired. If you receive a notice of a lawsuit, consult with a lawyer immediately to discuss filing an answer that includes a statute of limitations defense.

The second clock here is the Fair Credit Reporting Act's 7-year clock. This clock starts running on the data of first delinquency, which was some time in 2007 or 2008, and preceded the date of foreclosure. Add 7 years to the date you missed your first payment to learn when the 7-year clock runs out.

What to do about your credit report? If the date of first delinquency was more than 7 years ago, file a dispute with each consumer credit reporting agency that reports the delinquent mortgages and subsequent foreclosure.

What to do about any collections? Validating the debt, which you mentioned you already did, is a good idea. Because the California foreclosure occurred so long ago, include a cease communications notice in your debt validation so that the collection agent stops pestering you about the deficiency balances.
Elyse R.
Barnesville, PA  |  March 27, 2014
I have recently pulled my credit report and noticed debt that dates back over the SOL. It is in collections and has been for years. I sent debt validation letters and received letters back saying they are going to remove the debt because they could not provide validation. I also received a letter back (from a different collection agency) showing validation but the debt is over 7 years old, which falls out of the SOL. Can I have this debt removed from my report? I received another letter back from a different creditor stating they requested validation of the debt from the original creditor and if they can not validate the debt within 30 days they will send it back to the creditor. Does the collection agency have to provide the validation within 30 days or do they just have to respond to the validation letter within 30 days?
March 28, 2014
The Debt Validation page addresses your questions (and more!). Please ask any follow-up questions you may have about debt validation on that page.
Tareq A.
Arlington, VA  |  March 22, 2014
I am an international student and I am required to have a medical insurance. On Jun 2013 I went to a hospital's emergency room and provided my insurance and they accepted it. Two days after my visit to the hospital, I finished my studies and traveled back to my country although my insurance was valid for extra month (they sell insurances for 4 months and I stayed for 3 months). On Mar 2014, I received a call from a collection agency saying I have to pay $ 4K for visiting the hospital. I told them that I had insurance at that time and they should pay, they told me that the insurance refused to pay. I told the agency I will call the insurance which I did and they told me that we sent you a claim application on Jul 2013 but you didn't send it back. I told them that I finished my course and left the country and I don't leave at the old address anymore. Now I am waiting for the insurance's respond but the agency is still calling me and as a student I can't pay that amount and it's not my fault that the insurance didn't pay ( I followed the instructions of the insurance by calling them before going to the hospital) and I had to leave US because I am not allowed to stay after finishing my course. What should I do?
March 23, 2014
I believe you are taking the proper steps. Stay on top of the insurance company. Keep records of all your communications with them (phone log- including the date, time, name of person with whom you speak, and what you discussed; emails; faxes; or letters you send). Have them send you a new claim form and send it back right away. Verify that is received.

Call the hospital and find out the deadline for the proper paperwork to be received, too.
Adam K.
Fairbanks, AK  |  March 21, 2014
A debt collector has now; harassed me, called me at work when I told them it wasn't ok (i work at an airport), and is now threatening that we have to give them another payment on this month (we set up monthly payments with them) or we have to pay the full amount of the debt. Is this at all legal? Do I have a case to sue?
March 21, 2014
Send the collection agent a cease communications notice explaining you are not permitted to receive telephone calls at your place of employment. If the collection agent continues to call you, consult with a lawyer who has consumer law experience, and ask if you have a cause of action (a legal reason to file a lawsuit) under the Fair Debt Collection Practices Act.

Regarding the settlement agreement, I cannot comment on an agreement I have not read. Bring it to a lawyer and ask him or her to explain your rights and liabilities.
Ben T.
Kirkland, WA  |  March 20, 2014
I have a debt from 10/2007, SOL in WA is 6 years. Initially I contacted them and agreed to a settlement yesterday, however made no payments yet. I then followed up with them again today asking them to validate the debt. They were unable to provide me any information other than when they received the account. I no longer wish to pay them. Have I accidentally restarted my SOL clock? I live in Washington state if that makes any difference. Thank you.
March 21, 2014
Your saying, "I contacted them and agreed to a settlement yesterday..." gives me pause. Exactly how did you agree to a settlement? Did you sign anything? Was this a spoken conversation over telephone? Did you fax or e-mail a contract to the collection agent?

A telephone conversation to negotiate a settlement will not restart a statute of limitations clock. A contract to settle the debt will restart the clock. Consult with a Washington lawyer who has consumer law experience if you feel you're in a gray area.
Nicole K.
Coon Rapids, MN  |  March 07, 2014
I just received a "Summons and Claim" for conciliation court from a collection agency trying to sue me for an OLD debt. The debt is from April 2008. The SOL in my state is 6 years. We have court in May 2014. My question is, the SOL will be up in April on this debt, when we go to court in May 2014, will this still hold up in court even though the SOL will be up in April?
March 07, 2014
If the collection agent (plaintiff) filed its action to sue you before the SOL clock ran out, then raising the SOL as a defense will be ineffective. Consult with a lawyer who has consumer law experience immediately.
Pj W.
Los Angeles, CA  |  February 19, 2014
In 2007 I bought a home in Denver, Co with an investment group. In order to secure the purchase I was advised to get a Heloc loan for $60,000.(I signed docs in CA with Wells Fargo.) The property was foreclosed in 2009. What's the statute of limitation on (HELOC LOAN) unsecured debt in CA and CO? Debt collectors are demanding payment. Please advise.
February 19, 2014
You have a complex situation, and there are many details you didn't mention that matter. For example, is your HELOC secured by the Colorado property or a property you own in California? What, if any, choice of laws clause was written into the HELOC loan contract? Does Colorado's limited anti-deficiency protections apply here?

If your HELOC was secured by California property, then consult with a California lawyer who has mortgage/deed of trust experience. If the HELOC is tied to the Colorado property, then consult with a Colorado lawyer.
Jackie B.
Daphne, AL  |  February 18, 2014
I received a letter today 02/18/14 from an attorney for a motion to allow post judgement discovery this is from a judgement entered against myself on May 6, 2002 from a bank. This is 12 years is there a statue of limitations on which they can collect this debt? Thank you.
February 18, 2014
Each state has its own statute of limitations for a judgment. Some are short and some are long — as much as 20 years. Most states allow judgment-creditors to renew a judgment. You need to research three issues:
  • What is the statute of limitations for a civil judgment in your state of residence? What are the rules for renewing and reviving a judgment in your state?
  • If the statute of limitations is shorter than 10 years, did the judgment-creditor renew the judgment?
  • What are the rules for post-judgment discovery in your state? In other words, what does your state require you to disclose?

Contact the civil court where the judgment was filed to learn if the judgment was renewed. If the judgment is still valid, consult with a lawyer in your state who has consumer law experience to learn what, if any, information you need to disclose under your state's post-judgment discovery rules.

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