Collections Agencies, Laws & State Statute of Limitations

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

What is my liability when a collection agent buys my debt?

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Highlights


  • Understand the collections process.
  • Validate old debts.
  • Know which statute of limitations applies to you.

First, 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.

Struggling with debt questions? Let the Bills.com 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.

Is it worth your time to validate a debt? Yes! Collection agents cannot validate 41% of the accounts less than 3 years old. Collection agents cannot validate 64% of the accounts 6 years of age or older. Overall, the debt industry can validate about half of all accounts (The Structure and Practices of the Debt Buying Industry (PDF)). The least likely accounts to be validat­ed are med­ical, tele­com­munica­tions, and utility debts.

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.

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 Bills.com 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.

ost 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.

Best,

Bill

Bills.com

51 Comments

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  • GW
    Jan, 2013
    gary
    Discover Card sold my debt to a collections company who has tried to collect for the last three years. I ignored them and so they froze my checking account and have now had the local sheriff dept. take the money out ($1,164) and send it to them. Are they able to do this again if I open a new account, or have I heard the last of them? The original debt was for just over $10,000.
    0 Votes

    • BA
      Jan, 2013
      Bill
      You indicated you reside in New York. Under New York law, a judgment-creditor can levy or freeze a judgment-debtor's financial accounts for as long as the debt is due or 20 years, whichever is less. However, a 2009 law, the New York Exempt Income Protection Act (EIPA), exempts Social Security and other subsistence and retirement payments from creditors. Therefore, if you receive Social security or similar payments you may be able to have the amount levied from your account returned to you.

      Consult with a New York lawyer, or legal aid organization that assists people with low or no income, about filing a motion to vacate the default judgment that is filed against you.
      0 Votes

  • SE
    Oct, 2012
    Steph
    We had a collection agency that we disputed via Experian. They reported the debt as paid, closed. Now, they are continuing to call us several times a day wanting to be paid. Is this legal??? What do we do?
    0 Votes

    • BA
      Oct, 2012
      Bill
      Whether a debt appears on a credit report does not control or have any influence on its collectability. Many debts are never reported to the consumer credit reporting agencies, but that does not mean those debts are invalid or uncollectable. For example, if you borrow $10 from a coworker to buy yourself lunch, your coworker will not report that debt to Equifax, Experian, or TransUnion. You still need to repay your coworker even though only the two of you know of the debt.

      It is unclear if the debt in question is paid and settled or unpaid. If the debt is unpaid, the general rule is the collection agent or original creditor has the right to collect the debt regardless of a state statute of limitation. Unfortunately, you did not mention your state of residence. If your state's statute of limitations passed, and you are a Wisconsin resident (which is a possibility based on your e-mail address), then the collection agent may not have the right to collect the debt. To answer your question specifically, we need to know:
      • Your state of residence
      • The date of last payment on the debt
      • The type of debt (credit card, student loan, mortgage, and so on)
      • If the debt was settled/paid

      Out of curiosity, do Equifax and TransUnion report the debt? If so, what status do they report for this debt?

      Keep in mind that under the Fair Credit Reporting Act, derogatory accounts may appear on your credit report for up to 7½ years.

      0 Votes

  • JT
    Jul, 2012
    Jen
    We had a credit card debt from 03/2005 on our credit report. Admittedly, we allowed it to default because of financial problems we were having. It even showed that this debt from "GS" was purchased by a collector on our credit reports. The collector that purchased this debt, "LVNV", is also listed on our credit reports but shows the debt originating in 03/2008, when they purchased the debt. I have sent two letters requesting for them to validate the debt, both signature on delivery (so I could confirm they'd received the letter), and both were refused by "LVNV". Now that our situation has improved I am trying to rebuild our credit, but from what I've read "LVNV" can't legally do this, can they? Are they allowed to refuse written communication? Are they allowed to bypass debt statute of limitations by presenting a debt originating when they purchase it?
    0 Votes

    • BA
      Jul, 2012
      Bill
      LVNV Funding buys collection accounts that, according to several Web sites, are nearing the 7½-year deadline derogatory accounts may appear on a consumer's credit report. Under the Fair Credit Reporting Act, a federal law, the 7½-year clock starts at the date of first delinquency. No other date, such as when one collection agent sells a collection account to another is significant. If, as you suggest, LVNV reports a different, later date of first delinquency, it violates the FCRA.

      You asked about refusal of delivery of a Certified Mail or similar message. There is no federal or state law I know of that makes such conduct illegal. My suggestion? Send LVNV and its collection agent Resurgent debt validation letters via Priority Mail to their street addresses, which are available on the LVNV Funding and Resurgent Web sites. Priority Mail generates notification of delivery notices. See the USPS Web site to learn more.

      Simultaneously, send dispute letters to the credit reporting agencies that are displaying the incorrect date of first delinquency for your debt.
      0 Votes

  • KG
    May, 2012
    Kiersten
    I received a letter from a collection company on behalf of the superior court. I responded with a request for validation and the courts responded with a copy of an application for deferral of court fees and/or costs and consent to entry of judgment. I don't know if that means there was a judgement entered against me for this and therefore which SOL applies. Either way, I believe the SOL to collect is long past. Can I tell the Superior Court that they can no longer collect or report this debt to credit bureaus? Also that interception of any tax refund I may be entitled to exceeds the garnishment limitation? Thank you for your thoughts!
    0 Votes

    • BA
      May, 2012
      Bill
      I confess I'm at a loss to understand exactly what is happening in your case. In my experience, I have not seen a collection agent work for a superior court, and I can only speculate why a court would believe it has the right to collect money from you. You mentioned a garnishment, and a tax refund interception, which tells me a judgment may already be in place.

      Because my stating my confusion does nothing to assist you, I urge you to consult with a lawyer who has civil litigation experience. He or she will suss-out the facts of your case, where you may be in terms of your state's statute of limitations, and if someone or something has a judgment against you.
      0 Votes

  • TR
    Apr, 2012
    Tim
    Several years ago, I received a parking ticket in Spokane, WA while visiting my brother in the hospital. I was leaving town right after the visit and forgot to pay the ticket -- it was for $10, now I am getting collection calls and letters from a collection agency for $105.00. I have only spoken to the agency once on the phone about 6 years ago and have never responded in writing to the agency. How can they keep calling me and sending me letters on this ticket?
    0 Votes

    • BA
      Apr, 2012
      Bill
      In almost all states, a creditor may continue collection efforts on a debt after its statute of limitations expires, and until it is paid. My advice? Negotiate a pay for delete settlement of the debt. Follow the link I just mentioned to learn more.
      0 Votes