Collections Advice

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READER QUESTION

I have some big debts. What can creditors do to me? What are my rights?

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Bills.com Resident Expert
Feb 06, 2012
HIGHLIGHTS
  • Review the debt collection process.
  • Understand the importance of debt validation.
  • Respond to any summons you receive.
BILL'S ANSWER

Thank you for your question about your debt, how the debt collectors will pursue collections, and what options you have.

Charge-off

When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to "charge-off" or '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 charge-off date has almost nothing to do with the statute of limitations for debts. To learn more about the distinction between these issues, read Charge-Off & Credit Report.

At the charge-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.

Debt Validation

If a collection agent a debt it states you owe, you have the right to do what is called debt validation. If the debt is many years old or you do not recall the debt, validate it.

Fair Debt Collection Practices Act

Collection agents often use aggressive tactics, when contacting the debtor. Collection agents are know to 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 and many others are illegal under the Fair Debt Collection Practices Act (FDCPA). Start here to learn the rights consumers have in collections under the FDCPA.

Judgment

A creditor -- a debt collector that owns a debt account is a creditor -- has several legal means of collecting a debt. Before the creditor can start legal collections, 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" or a "summons and complaint." In some jurisdictions, a process server will present the summons personally. In others the sheriff's deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)

Summons

If you ever receive a summons, you should do as it instructs! This is not a social invitation that you can ignore. In the hearing, the judge will decide if the creditor should be allowed to collect the debt. If the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.

Therefore, if you receive a summons, the first thing you should do is contact the law firm representing the creditor. Open a negotiation to see if they are willing to settle the debt. If not, it would be wise to respond as indicated in the summons. If there is a hearing, attend it and present your side of the story to the judge. Use facts, tell the truth, dress appropriately, and show the court respect. The court may or may not decide in your favor, but at least you will have exercised your right to be heard.

The court may decide to grant a judgment to the creditor. A judgment is a declaration by a court that the creditor has the legal right to demand 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. We discuss each of these remedies below.

Wage Garnishment

The most common method used by judgment creditors to enforce judgments is wage garnishment, in which a judgment creditor would contact the debtor's employer and require the employer to deduct a certain portion of the debtor's wages each pay period and send the money to the creditor. However, several states, including Texas, Pennsylvania, North Carolina, and South Carolina, do not allow wage garnishment for the enforcement of most judgments. In several other states, such as New Hampshire, wage garnishment is not the "preferred" method of judgment enforcement because, while possible, it is a tedious and time consuming process for creditors. In most states, creditors are allowed to garnish between 10% and 25% of your wages, with the percentage allowed being determined by each state. See Advice on Judgment Garnishment to learn more about wage garnishment.

Levy Bank Accounts

A levy means that the creditor has the right to take whatever money in a debtor's account and apply the funds to the balance of the judgment. Again, the procedure for levying bank accounts, as well as what amount, if any, a debtor can claim as exempt from the levy, is governed by state law. Many states exempt certain amounts and certain types of funds from bank levies, so a debtor should review his or her state's laws to find if a bank account can be levied. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state's rules.

Lien

A lien is an encumbrance -- a claim -- on a property. For example, if the debtor owns a home, a creditor with a judgment has the right to place a lien on the home, meaning that if the debtor sells or refinance the home, the debtor will be required to pay the judgment out of the proceeds of the sale or refinance. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment. Again, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state's laws to learn creditor can and cannot do to enforce its judgment. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state's rules.

Debt resolution

If you have a judgment against you, consult with an attorney licensed in your jurisdiction to learn how the judgment will affect you, based on your individual financial circumstances and your local rules.

It is not too late to contact the creditor or the law firm that either represented the creditor or bought the debt, and present them a settlement offer. Even with a judgment in place, the law firm must spend money to try to collect the debt. Getting a wage garnishment, levy, or lien takes time, and time to a law firm is money. The law firm may settle for a lump-sum payment. See "Debt Negotiation and Settlement Advice" before opening negotiations with a creditor. See "What Are My Debt Consolidation Options?" to learn more about your rights and options for resolving the debt.

Important! Get all settlement offers in writing before sending a check to the law firm or collection agent.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (111)


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Julie M.
Santa Ana, CA  |  January 18, 2012
We are currently working with a Debt Consolidation company to clean up his debt. We recently ran a credit report on my husband to ensure we did not miss any other possible open debts. It seems he had a credit card back in 2008 for $315 which he did not pay (This is the amount reflected on the credit report). We've never heard from the CC company or from the Collection agency in all this time. The Debt Consolidation company contacted the information provided on the credit report and per the collection company, we now owe $2000. The collection company is not able to explain to us why the bill is now $2000 while the credit report shows $315. What can we do? We can pay the $315 but do not feel the $2000 is justified.
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Bills.com
January 24, 2012
A surprising balance is common due to original creditors and collection agents adding fees, interest, penalties, and mystery charges to a collection account. As egregious as the example you shared is, this is not the worst Bills.com readers reported.

One open secret in the debt collection trade is that collection agents buy collection accounts from original creditors for pennies on the dollar. Assuming a collection agent now owns the account, offer it 10 of 15 cents on the dollar. That may seem like a tiny amount, but it will still be a huge gross profit margin for the collection agent. Negotiate a pay for delete.
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Gabriela H.
Los Angeles, CA  |  January 11, 2012
credit card company put lien on mom and she didn't receive proper summons and if she did she is illiterate now she is going through divorce and the credit card company wants their money with the settlement money. please advise as she has to sign papers on friday.
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Bills.com
January 11, 2012
Consult with a lawyer who is licensed to practice law in the state where your mother resides to help her learn more about her rights and liabilities. You mentioned divorce. It is likely your mother is already consulting with a lawyer about that issue. Help her gather all of the documents and letters she received regarding the debt issue, and bring them to her divorce lawyer. He or she will advise your mother accordingly.
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Roderick C.
Cambridge, MA  |  December 23, 2011
I'll try to use the words correctly: if a debt collector sues and wins against a debtor, and request to garnish (or is it levy?) the bank account, and if MA allows $425 to be exempt, if the account has less than this amount, let's say $300, can the account still be frozen by the bank?
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Bills.com
December 25, 2011
A bank levy is in some states called a bank garnishment. The bank can only freeze the assets above the minimum amount limited by the state laws, at the time it receives the notice of levy. However, the creditor can obtain multiple bank levies, so if the bank account goes above the minimum, it won't be protected if a new bank levy is placed.
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SHEILA A.
Alief, TX  |  November 07, 2011
I took out a payday loan about 2 years ago and defaulted.The debt was for $768. I paid half of it in March & never paid the remainding balance with the debt collected now I get a call saying that they are gonna sue me in court & I should contact my local court house. How do I get this information? And can they even do this. I currently reside in Houston, TX (Texas)
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Bills.com
November 07, 2011
Two reading assignments for you:
  1. Payday Loans & Hot Checks in Texas discusses how Texas law regulates payday loans. In particular, it discusses resolving delinquent payday loans.
  2. Texas Collection Laws discusses your rights and liabilities as a consumer in Texas.

It is possible legally, but not cost-effective to file a lawsuit to collect $380. Your county court system may have a public Web site that displays lawsuits filed in that court. Call your county clerk of courts office to learn how it publishes the list of lawsuits filed in your county.

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Bill H.
Gastonia, NC  |  November 02, 2011
I had a payday loan about a year and a half ago and made regular payments on it, however the company I worked for failed to do the direct deposit on schedule and paid us paper check 3 days later, after the bank account had wrecked, my mother even transferred money into our account several times to fix it, eventually the company I worked for changed names and most of us lost our jobs. The two loans were almost paid off and today my Mother in MD was horrified to hear their attorney stating there was a warrant for my arrest, is this even legal to discuss this with someone other than me. I am currently not employed regularly I get here and there work from the church, who said to try and negotiate a payment, what should I do. Distraught in NC
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Bills.com
November 03, 2011
I can't give you legal advice, but will share some information with you.

A debt collector may not lie or mislead anyone when collecting a debt. Saying that there was a warrant for your arrest is probably a lie. I am skeptical that it was even an attorney who was speaking with your Mom.Debt collectors can contact third parties to locate your address, phone number, and location, but are not allowed to discuss your debt situation with others.

You should speak with a lawyer that specializes in cases involving violations of the Fair Debt Collections Practices Act. If you have a strong case, the lawyer will collect a fee from the people whom I believe are violating your rights.

I would not commit to a payment plan, until the other issues were investigated.
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Kellien H.
Chagrin Falls, OH  |  November 01, 2011
I have a 7 private loans with Salliemae, one of the 7 recently defaulted. I called & they said I ill need to wait a week to know what my repayment situation will be. Can you tell me, will they want the total amount of $22,000 paid in full or do they usually take payments to pay it off?
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Bills.com
November 01, 2011
Negotiate a repayment schedule. If the loans are federal, consider the IBR program mentioned here.
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Stacey J.
Orem, UT  |  October 28, 2011
I have a medical bill that was sent to collection; the bill was the result of an auto accident. And there was a lawsuit filed against me by the collection agency. Since this, my auto insurance has paid the original due amount to the medical provider. It is my understanding that the contract between the medical provider and collection agency is basically cancelled, and I was told interest fees would be disregarded. My question is, since there were fees incurred from the pending lawsuit, can the collection agency still try to collect money from me for those fees?
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Bills.com
October 28, 2011
Consult with your insurance company to learn exactly what terms it agreed to with the medical services provider to settle the debt. Generally speaking, the insurance company has a fiduciary duty to pay all of the bill, including the interest.
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Clint L.
Lubbock, TX  |  October 20, 2011
I took out a small signature/personal unsecured loan of $1100.00 , I recently lost my job and the means to pay it back. The creditor is unwilling to accept token payments to settle the debt. They sent me a letter stating they would take legal action very soon filing a breach of agreement/theft of services against me in civil court (in Texas). How likely is it they will actually follow through with these threats? or is this another tactic used by small loan companies to scare me into making a payment? Lastly With no job and No assets besides personal belongings (TVs, DVD Player , radio bed, etc.) Would I be considered "judgment proof" in the state of Texas?
Avatar
Bills.com
October 20, 2011
I cannot predict the likelihood of a creditor filing an action against a consumer because from a macro-economics perspective, there is no rhyme or reason to the incidents of breach of contract lawsuits. Does the creditor have the right to file a lawsuit? Based on the facts you provided, the answer is probably yes. Will it for an $1,100 loan? The odds are the answer is no, but the answer really depends on the aggressiveness of the plaintiff.

The concept of a consumer being judgment proof is slippery because it is not written into any state or federal statute or any case law. I would be remiss if I pronounced you judgment proof without knowing your age, health, earnings potential, any rights or claims you may have, and so on. Consult with a Texas lawyer who has consumer law experience to learn more about your rights and liabilities. See also the Bills.com resource Texas Collection Laws for an overview of relevant Texas law.
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