- Fees added to a collection account may not be subject to a state's usury laws.
Does a state's usury law protect consumers from collection agencies that add high fees to a debt?
I have a credit card debt that was written off by the credit card company and sold to a collection agency. I have verified the debt. Does the collection agency have to disclose to me the rate of interest as well as fees they are adding to the debt? They currently will only tell me the balance owed. i live in the state of Michigan is the rate they can charge me limited by usury laws in my state of the maximum rate the original credit card company could charge me?
Before I address your questions, we need to discuss several terms because they have a significant impact on your situation.
A collection agent is either a creditor or is a representative of the original creditor. Both collection agents and creditors are bound by federal and state laws concerning the collection of debt. Specifically, the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA) are key laws regarding these issues.
For a brief guide, see the Bills.com resource Collections Agencies, Collections Laws and Your State’s Statute of Limitations to understand the collections process.
Assignment of Debt
Most consumer debt contracts give the original and subsequent creditors the right to assign the debt. A collection agent buying a debt will do so for 5 to 50 cents on the dollar. The collection agent has the right to collect the entire balance due plus interest (state laws set the rules in this area).
A third party purchasing a collection account must abide by previous contracts between the parties. If a debtor creates a settlement agreement with a creditor, all subsequent assignees of the collection account take the account subject to its terms.
Therefore, if a debtor has a legal contract with a previous debt collection agency, then any current party attempting to collect the debt is bound by the terms and conditions of the contract. Assuming that a contract stipulated no interest to accumulate or other fees, then the current agent may ask for immediate payment in full plus additional fees, but the debtor has no obligation to agree to the new terms.
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. More on bare and fully documented collection accounts in a moment.
If a collection agent demands payment of a debt an individual does not owe, or more than they owe, under federal law the individual can dispute the debt in writing. The formal terms for this process are "debt verification" or "debt validation."
A debtor should, as a matter of course, validate a debt when a collection agent attempts to collect the debt. Why? Just because a voice on the telephone claims that a debtor owes the collection agent money does not necessarily mean the collection agent owns the right to collect the debt, or that the debt is even owed.
According to Section 809(b), 15 U.S.C. § 1692g(b) of the FDCPA, if the consumer notifies the debt collector in writing within the 30-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.
You can find a sample debt validation letter at the Bills.com debt self-help center.
If the debt collector has a bare account and the consumer seeks a debt validation, the collector has no means to validate the bare account 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.
What is a proper validation? Account statements from the original creditor including payment history starting with the original creditor. Also, a copy of the original loan agreement or credit card application, or lacking that, account statements from the original creditor.
Under the FCRA, if a creditor cannot verify a debt it may not collect the debt, contact the debtor about the debt, or report it to the credit reporting agencies.
Your Questions About Collection Agency Fees
You do not need to verify or validate the debt — the collection agency does. If you meant to write, "I asked for a debt validation, which the collection agency provided," then my next question is, Did the collection agency provide complete and proper validation? If so, then we will move on to your other questions.
You asked about interest and charges on a collection account. FDCPA §808 reads in part
...the following conduct is a violation of this section: (1) The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.
Section 808(1) raises the questions:
- Are interest and fees allowed in your credit card agreement, and
- Are interest and fees allowed in your state?
Review your credit card agreement to see if it mentions that if your account goes into collections, the lender has the right to charge interest and fees. My guess is it does. If not, does are interest and feels allowed by your state? My guess — again there is that word — your state allows interest and fees.
You asked if the lender is required to disclose these fees. I am not aware of any requirement that lenders must disclose collection fees, as such. However, the Credit CARD Act of 2009 requires credit card issuers to disclose and highlight fees consumers may be charged and make periodic statements indicating these fees.
Let the Bills.com Debt Coach help you learn the costs and benefits of each of your debt resolution options. It’s free, and could save you hundreds in interest costs and fees.
Collection agencies are not required to disclose how much of a debt is interest, the original balance, or fees under the FDCPA. You raise an interesting theory, namely that the fees charged by a collection agent exceeds Michigan (or another state’s) usury laws.
Consult with an attorney in your state who has experience litigating consumer law. In my opinion, you may have a viable argument to reduce the fees collection agents charge.
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 Q3 2023 was $17.291 trillion. Housing debt totaled $12.489 trillion and non-housing debt was $4.802 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 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Minnesota credit card delinquency rate was 2%, and the median credit card debt was $453.
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.