How Debt Collection Works


How Debt Collection Works

You may think you already know how debt collection works, but there is more to it than most people realize. There is a whole netherworld of debt collection that deals with unpaid, unsecured debt that might put you into contact with some very unpleasant, unethical people who will do anything, including violating existing laws in order to collection from you on debts you may have forgotten about and may not even know exist. The Federal Trade Commission (FTC), which protects consumer rights, is charged with enforcing the Fair Debt Collection Practices Act (FDCPA). This act forbids collection agencies from employing unfair, deceptive, or abusive tactics, but some debt collectors still knowingly violate the law in the hopes that they can scare you into paying up. They don’t care about what’s ethical, fair, or legal. They just want the money.

Things You May Not Know About Debt Collection

Did you know that you might have debts you’re not even aware of? Sometimes people can be blindsided by old debts that appear seemingly out of nowhere, debts long forgotten for old utility accounts, medical bills, or anything at all that was paid for with a credit card. What you may not know about credit is that if you have an old debt from a credit card company that has been written off by the original owner of the debt, it can be sold to a debt collection company that you never heard of. However, if the caller or e-mailer will not provide a personal name, a company name, a street address, or valid phone number, the odds are, this contact about a so-called debt, is not legitimate, so you should not pay it. Make notes about what the caller says, or print off their e-mail and contact your state Attorney General’s office, or the FTC and provide them as much information about this attempt to swindle you. Legitimate debt collectors will provide a phone number or address. If one of them contacts you and you don’t wish to be bothered any more, then write them a letter demanding that they stop contacting you. By law they have to do this. Be sure to keep a copy for your own records.

How Your Debt Is Bought And Sold

In some cases, however, a hitherto unknown debt collector might contact you about an old debt and the debt is legitimate. Here is how it works, according to a recent article in The New York Times Magazine entitled, “The Dark, Lucrative World of Consumer Debt Collection” “When debtors stop paying those (credit card) bills, the banks regard the balances as assets for 180 days. After that, they are of questionable worth. So banks ‘charge off’ the accounts, taking a loss, and other creditors act similarly. These huge, routine sell-offs have created a vast market for unpaid debts – not just credit-card debts, but also auto loans, medical loans, gym fees, payday loans, overdue cellphone tabs, old utility bills, delinquent book-club accounts. The scale is breathtaking. From 2006 to 2009, for example, the nation’s nine top debt buyers purchased almost 90 million consumer accounts with more than $140 billion in ‘face value.’…(they are) bought at a steep discount. On average, they paid just 4.5 cents on the dollar. These debt buyers collect what they can and then sell the remaining accounts to other buyers, and so on. Those who trade in such debt call it ‘paper.’”

According to that same New York Times Magazine article, your debt may pass from hand to hand for years to many different collectors, including debt buyers, collectors, brokers, and criminals who will try to collect every dime of the original debt that they may have only paid pennies for. Some of this debt may be 10 or even 15 years old, long forgotten by those consumers who racked up that debt. And even though the statute of limitations for the debt may be long past, these bottom-feeding debt collectors will still try to get you to pay, by any means necessary, including some methods deemed illegal by the FTC. It’s a fact that the collections industry has more complaints filed against it annually than any other business. In fact, according to that same New York Times Magazine article quoted above, “‘false threats of lawsuits  from collectors’ more than doubled from roughly 12,000 in 2008 to more than 30,000 in 2012. And the combined number of complaints about threats of violence and ‘false threats of arrest or seizure of property’ have jumped, more than tripling. David Torok, who oversees the F.T.C.’s complaint database, speculates that there were ‘more consumers truly on the edge’ and that collectors were therefore simply ‘trying to squeeze even harder to get some money out of an extraordinarily dwindling pot.’”

Dealing With Ethical and Unethical Debt Collectors

So whether you’re confronted with recent debts, or debts so ancient that you’ve forgotten about them, the best way to deal with debt collectors is to talk to them. According to an article entitled “How Debt Collectors Get Your Money” that quotes Lynn Labrador, a senior director at the credit-scoring agency FICO, “People who avoid the phone calls and the letters are more likely to see a lender escalate to aggressive tactics like taking judgments…” So, if you talk to collectors, and are honest with them, there’s no reason why your debt needs to wind up in court. One reason why debt collectors take creditors to court is that they hope the creditor will ignore the court date. When that happens, the judge will generally give the collector a default judgment, which means that you, the debtor, have lost, and will be under legal compulsion to settle with the collection agency. So, if you’re ever served with a summons about a debt, by all means show up for your court date so that you’ll have a chance to tell your side of the story. The best way to avoid dealing with debt collectors is to know exactly what you owe. Get your annual free credit report from Annual Credit Report.Com.

Written by Kristy Welsh

So how is geeky Kristy Welsh (former rocket scientist and current software guru) also a credit expert? After being laid off from her career in Aerospace engineering, Welsh served a short stint as a mortgage professional in the early 90s. It was there she first learned how to fix people’s credit in order to get her loans funded. When the Internet, recession and bankruptcy came knocking on her door all at about the same time, she learned web programming, database design and a lot more about credit and debt. As a hobby, and to fill a need in the credit knowledge deficit of the average person, Welsh founded in 1997.

From daily research and correspondence with the credit and debt challenged, Welsh turned the original 9-page site into a personal finance information powerhouse. In 2001, Welsh published Good Credit is Sexy, a tongue in cheek guide to restoring credit. The book is now in its 4th edition. In November 2013, Welsh retired from and was subsequently approached by to continue her conversation with the American public regarding all things credit and debt.

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