Collections Agencies, Laws & State Statute of Limitations
- Understand the collections process.
- Validate old debts.
- Know which statute of limitations applies to you.
What is my liability in a debt being bought by collection agency?
What is my liability when a collection agent buys my debt?
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.
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 validat-ed are med-ical, tele-com-munica-tions, 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.
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:
- Pay the debt outright
- Debt negotiation and settlement
- Debt consolidation
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.
Dealing with debt
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q4 2022 was $16.91 trillion. Housing debt totaled $12.26 trillion and non-housing debt was $4.65 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in South Dakota, 18% have student loan debt. Of those holding student loan debt, 5% are in default. Auto/retail loan delinquency rate is 2%.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.
The SOL may have run out, depending on your date of default and the SOL that applies. Check the SOL for the state in which you live. If the college is in a different state than it would be good to review the language of the tuition agreement, to see if there is anything in it that governs what SOL applies. Do not pay a penny on this debt without more information, as making a payment would start the SOL anew. Send the collection agent a debt validation letter.
I can't speak to the mind of the collection agent as to why it won't settle or meet your terms. I wonder why you think that they will end up with nothing. Are you sure that they won't sue you before the SOL passes?
Some consumers confuse their state statute of limitations with the federal FCRA clock for credit reports. The two are separate and independent from each other.
My credit score is 388 and I am trying to clean up my credit and increase my credit score, I have 5 unpaid hospital bills, a loan that I did not finish paying, my mortgage payment, credit card loan, car insurance, utility bill and other misc. bills. Do I need to pay the unpaid bills?
Wanda, ideally you would pay your unpaid bills, but I don't know what you can afford to pay. Paying your mortgage is the most important. Not letting accounts go 30 days late, even if you can't pay them when due, which should be your aim. Some bills don't affect your credit score because they are not reported on a monhtly basis. However, if they go to collections that will hurt your credit score.
You might benefit from speaking in person with a credit counseling agency, to get advice on budgeting, general finance, and to discuss your credit report.