Debt Validation

What is debt validation and how do I do it? Also, how do I know if a debt is properly validated?

Ask for a debt validation when someone attempts to collect an old debt from you.

Collection agents are bound by federal and state laws concerning the collection of debt. Original creditors must also follow debt collection rules when attempting to collect a delinquent debt. The Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA) are key federal laws regarding these issues. Many states have consumer protection laws that overlap with both acts, and have stricter rules protecting consumers.

Assignment of Debt

Most consumer debt contracts give the original and subsequent creditors the right to assign the debt. Assignment is legalese for “sell the rights to the contract.” Collection agents buy most debts for 5 to 50 cents on the dollar. The collection agent has the right to collect the entire balance due plus interest, but does not necessarily expect to collect the full amount. State laws set the interest and fee rules collection agents can tack onto a debt.

How to Ask For a Debt Validation

If a collection agent demands payment of a debt a consumer does not owe, or more than they owe, the consumer can dispute their responsibility for the debt or the validity of the amount. The formal terms for this process are “debt verification” or “debt validation.”

A consumer 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 someone owes the collection agent money does not necessarily mean the collection agent has the right to collect the debt, or that the debt is even owed. If a collection agent cannot validate the debt, it may not collect the debt or report it to the consumer credit reporting agencies. A collection agent is stopped dead in its tracks if it cannot validate a debt.

A disputed debt could be:

• One already paid
• One you do not owe
• An amount different from what is demanded
• Related to a hospital stay. If you informed the hospital you could not pay for the care, the hospital should have considered payment under its charitable care policy.
• A time-barred collection (see the statute of limitations Quick Tip above)
• One discharged in bankruptcy

Here is a template of a debt validation letter to help you get started:

Download

Edit our sample debt validation letter to fit your needs. Then, send it USPS Certified Mail to the collection agent who demands you pay the old debt. Be sure to send this letter within 30 days of receiving notice of the attempted collection. Keep careful records of your debt validation. Repeat this process if the collection agent sells the collection account in question to a different collection agent. (See the comments from readers below for examples of collection agents that seem to sell the accounts of people who ask for debt validations.)

To learn more background information about debt validation and what information you can expect to receive from a collection agent, read on.

Debt Validation Statutes & Case Law

Debt validation rules are set by Congress in statutes and by federal courts in case law. As with other laws, Congress writes the rules, and then the courts interpret them. Here, it is important to understand both because some federal appeals courts interpreted the verification rules narrowly.

We discuss both the statutes and the case law here because other personal finance Web sites focus on the statutes only, and others offer incomplete discussions of the case law. Some discuss only state appellate law, which applies in that state only. You need to understand both the statutes and the case law to get a complete picture of your rights.

Debt Validation Statutes

Let us look at the statute first. Here is FDCPA Section 809(a) (15 U.S.C. § 1692g(a)):

1. “Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —
   1. “the amount of the debt;
   2. “the name of the creditor to whom the debt is owed;
   3. “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
   4. “a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
   5. “a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.”

According to the statute, after receiving the notice of dispute from the consumer, the collection agent must:

• Suspend collection activities regarding the claimed debt until the collection agent receives verification of the debt or receives a copy of the judgment against the consumer
• Provide verification, by mail, to the consumer, including:
  • The name and address of the original creditor
  • A statement from the original creditor the debt is valid
  • The amount of the original debt
  • Copies of judgments (if any)
• Not report the debt to the credit reporting agencies, including Equifax, Experian, and TransUnion, according to some interpretations of the statute. Or, according to other interpretations, may report the debt to the credit reporting agencies as “disputed.”

If the collection agent is collecting more than one account from a consumer, the consumer must instruct the collection agent how to apply any payments made to each debt. The collection agent may not apply a payment to a disputed debt.

Debt Validation Case Law

If all federal appeals courts had been asked to interpret the debt validation law and did so consistently, we would have a fair understanding of how validation is supposed to work, what information collection agents are supposed to give consumers when validating a debt, and a uniform application of the rules.

However, four federal appeals courts that Bills.com could find weighed in with definitions of validation that appear tighter than what Congress may have had in mind when writing the FDCPA.

• In the Third Circuit, the court articulated this standard: “computer printouts which confirmed amounts of debts, the services provided, and the dates on which the debts were incurred constituted sufficient verification” (Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991))
• The Fourth Circuit uses a much lower standard: “[v]erification only requires a debt collector to confirm with his client that a particular amount is actually being claimed, not to vouch for the validity of the underlying debt” (Chaudhry v. Gallerizzo, 174 F.3d 394 (4th Cir. 1999))
• The Ninth Circuit follows the Fourth Circuit’s lower standard (Clark v. Capital Credit & Collection Servs., 460 F.3d 1162 (9th Cir. 2006))
• The Eleventh Circuit sets the bar even lower: “verification of a debt involves nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed; the debt collector is not required to keep detailed files of the alleged debt” (Azar v. Hayter, 874 F.Supp. 1314, 1317 (N.D. Fla.), aff’d, 66 F.3d 342 (11th Cir. 1995), cert. denied, 516 U.S. 1048 (1996))

Although this has no legal weight or precedent, FTC counsel seems to follow the Fourth Circuit standard, too. (Wolman-LeFevre letter dated March 10, 1993)

We could find no cases in other nine circuit courts regarding debt verification, and no federal cases contradicting the four mentioned. The US Supreme Court has made no decision in this area.

Therefore, in states in the US Third, Fourth, Ninth, and Eleventh Circuit Courts, collection agent must provide two or three pieces of data in writing when a consumer asks for a debt validation:

• Confirmation from the original creditor the consumer owes the debt
• Confirmation from the original creditor the amount demanded is accurate
• Dates the debts were incurred, if the consumer resides in Delaware, New Jersey, Pennsylvania, or the Virgin Islands (Graziano v. Harrison as cited above).

It is unclear if the other circuit courts would require a collection agent to provide the dates the debts were incurred, or an itemization of the collectors’ added charges, which is what the FTC has recommended Congress add to the FDCPA.

If you live in one of the other nine circuits, then you can argue the collection agent must follow the statute, and not the standards set by the Third, Fourth, Ninth, and Eleventh Circuit Courts.

Must a Collection Agent Cease Collecting When it Receives a Verification Notice?

Collection agents must cease their collections activities when they receive a verification notice. A collection agent may resume these activities when it mails a copy of the verification to the consumer.

The 30-day period during which a consumer has a right to request a verification is not a grace period. A collection agent may continue their collection activities, including filing a lawsuit against the consumer.

In a 1997 opinion, the Seventh Circuit states "[t]he debt collector is perfectly free to sue within the thirty days; he just must cease his efforts at collection during the interval between being asked for verification of the debt and mailing the verification to the debtor." Bartlett v. Heibl, 128 F.3d 497, 501 (7th Cir. 1997) (Posner, J.).

The Sixth Circuit stated "[a] debt collector does not have to stop its collection efforts [during the thirty-day period] to comply with the Act. Instead, it must ensure that its efforts do not threaten a consumer’s right to dispute the validity of his debt." Smith v. Computer Credit, Inc., 167 F.3d 1052, 1054 (6th Cir. 1999).

There is no time limit on when a collection agent must respond to a verification. It may, for example, respond with its evidence 75 days (to pick a number out of the air for the sake of argument) after receiving the consumer’s debt validation request. It is unclear if, during those 75 days, the collection agent may not report the debt to the consumer credit reporting agencies, or if it must report the debt as “disputed.”

Conclusion

Send a debt validation letter immediately because there is a 30-day time limit for doing so. The collection agent, in turn, must respond with validation. As discussed above, what is complete and proper validation depends on your state of residence. See the Bills.com resource What if a Collection Agent Does Not Validate a Debt? if the collection agent does not comply with your debt validation request.