Most of us have a pile of “to-dos” that never seem to be done. For many people, this includes a stack of bills and debts that just keep getting higher. As much as you’d love to pay off that medical debt, there’s never quite enough to go around on payday. Having this debt hang over your head can be really stressful. A lot of people sit up at night, worrying about what will happen next to their debt. Read more to find out what debt collectors can – and can’t – do, how they might legally be able to claim that money, and how this might affect your credit history.
Written by Attorney Amelia Niemi.
Updated July 10, 2023
Most of us have a pile of “to-dos” that never seem to be done. For many people, this includes a stack of bills and debts that just keep getting higher. As much as you’d love to pay off that medical debt, there’s never quite enough to go around on payday. Having this debt hang over your head can be really stressful. A lot of people sit up at night, worrying about what will happen next to their debt.
Read more to find out what debt collectors can – and can’t – do, how they might legally be able to claim that money, and how this might affect your credit history.
Your debt could be sold to a debt collection company
After a few months of nonpayment, your debt might be sold to a company that specializes in collecting debts.
This means that the company you originally owed – the original creditor - doesn’t think it’s worth it to try to get the money anymore. They can sell the right to collect that money to a debt buyer. The original creditor will get some money, even if it’s just pennies for every dollar of debt.
The debt buyer can try to collect everything owed on the loan, including interest and penalty payments. They may or may not be successful. They can also sell the debt to another debt collection agency.
Every time your loan is sold to a new company, the old owner isn’t required to tell you anything about the sale. However, the new owner must send you an introduction letter. This letter must say who the company is and explain that you will make payments to them moving forward.
If you receive a notice that your debt was sold, you should ask the new company to send you a debt verification letter. The new owner must tell you how much you owe, and what the debt is for. If the company does not send you a verification letter with this information, they are not allowed to continue collecting the debt.
What can debt collectors do to collect a debt?
All debt collectors, including the original creditor and the debt buyer, have many different resources to try to collect a debt. They can call you and send you letters, asking for payment. They may try to get the payment in full, work with you to set up a payment plan, or try to settle the debt for less than what’s owed.
Collection companies can hire a law firm to sue you for nonpayment. If they win a judgment, they can garnish your wages, put a levy on your bank account, or even get a lien on your house.
What can’t debt collectors do?
Even though it seems like debt collectors may have a lot of power when it comes to what they can do to collect a debt, there are limitations on their powers.
The Fair Debt Collection Practices Act (FDCPA) is federal legislation that gives borrowers many rights to protect them from unscrupulous debt collection agencies. Knowing your legal rights when a debt collector contacts you is half the battle when it comes to protecting yourself.
For example, a collection company must be honest. They must tell you:
who they are and who they represent,
the true amount of the debt,
who owns the debt,
what might happen if you don’t pay the debt, and
whether the debt is past the statute of limitations, meaning that they can’t sue you to collect the debt if you don’t pay it.
However, other than validating the amount of debt and the name of the creditor seeking payment, debt collectors don’t have to answer your questions. If you think your old debt is outside the statute of limitations, or have other questions about the collections calls you’re getting, working with a local attorney can help sort things out.
A debt collection company can’t harass you. They can’t make excessive calls during the day, and they can’t bother you at night. They can’t threaten violence or destruction, they can’t curse at you, and they can’t release information about your debt to the public as an intimidation tactic. This means they can’t tell you that your office or grandparents will find out about the debt.
You also have the right to say when and how these companies can speak with you. You can tell them not to make phone calls to you while you’re at work, or let them only communicate with you in writing. This can make it a lot more manageable to go about your life, but be careful that when you limit communications, you don’t also put this debt out of your mind. You’ll still owe money on the loan, and interest and late fees will continue to accumulate.
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Secured loans and debt collections
Secured loans are debts that were taken on in order to buy something. Your mortgage and car payments are classic examples of secured loans. The only reason someone has a car loan is so they can have a car. If you miss payments on a secured loan, that property can be taken back by the lender. If you don’t make your mortgage payments, the bank can foreclose on your home. If you don’t make car payments, the lender can repossess your vehicle.
The exact procedure varies by state. Generally, banks can’t take your home without going through the court system in a foreclosure action. However, if you’re behind on your car loan, the lender might be able to repossess your automobile after even one missed payment. Your state’s laws will spell out what they can and can’t do, as well as your rights.
After the lender takes your property, they will sell it at an auction and use the money to pay back what’s still owed the loan. If the sale price at the auction doesn’t cover the loan, plus interest, late fees, and lawyer fees, you might still owe money. The rest of this debt will become unsecured loans, like most credit card debt, student loans and medical bills. Credit collection companies can continue to try to collect the rest of the unpaid debt, including by filing a lawsuit.
Debt collection lawsuits and collections judgments
After a certain point, if you don’t pay the debt, you might be sued for nonpayment of the collection account. Your state’s laws will say how long after a missed or late payment the creditor must wait before filing the lawsuit.
Although each state has specific procedural rules, the creditor must notify you of the lawsuit with the summons. You will have time to challenge their claims. Most courthouses have a self-help desk, or you can hire a private attorney to represent you.
Even if you agree that you owe the money, feel that you “deserve” a judgment against you, or think that the debt is so old, it’s past the statute of limitations so there won’t be a judgment, you shouldn’t ignore a summons. If you don’t show up, the creditor will automatically win and get a default judgment against you.
If the creditor wins the case and gets a judgment against you, they have the legal right to take the money from you. They can ask for a wage garnishment, where they take a certain amount of money directly from your paycheck. They may even be able to take money from your bank account with a bank levy.
Sometimes, collections agencies may even be able to put a lien on your home. This means that if you don’t pay the judgment, they could try to take your house from you, or that when you sell the house, you need to pay the creditor with money from the sale.
After a certain point, usually after about six months of no-payment on a debt, the creditor might decide to “charge off” the debt. This means that they write the debt off in their books as “uncollectable.” Even though the creditor makes this classification, it doesn’t change the nature of the debt.
Creditors can still try to collect the money from you, although they often sell the right to collect the debt to a collection agency at this point. The owner of the debt can call you and write you letters. They can also sue you to obtain a judgment for the money, interest, and even legal fees spent trying to collect the debt.
While a debt that’s been marked as a charge off doesn’t have any positive benefits for you, it definitely carries some downsides. Any debt that’s been charged off gets reported on your credit history for the next seven years. This will negatively affect your number during this period, even if you pay the debt off completely.
How collections can affect your credit report
Your credit report is a record of how likely you are to pay your loans and bills. People with better credit scores can get better interest rates on mortgages, credit cards, and other loans. Any time you have a late or missed payment, it can be reported to the credit bureaus. Late payments bring your credit score down as soon as they are reported.
Newer debt from the past few years will affect your credit more than older debt. After a seven-year time frame, old debts will fall off your credit history and won’t show up.
If you make up any late payments in full and pay any additional late fees from the collection account, you’ll see a note in your credit history, but it may not improve your overall credit score. This means that you might have to pay a higher interest rate on loans you take out in the future.
Your credit history can also affect your ability to get a job. Some offices include credit checks as part of their standard background checks for new hires. Because of this, it’s important to be diligent about keeping an eye on your credit, to make sure that there aren’t any surprises.
How to check your credit report
If you’re concerned about outstanding debts, or just want more information about your credit report, you can request a free credit report. There are three credit reporting agencies who provide this information: TransUnion, Equifax, and Experian.
It’s a good idea to get all three each year (although you don’t have to do it at the same time). When checking your credit reports, you should make sure your information is correct, and that any debts are accurate. You have the right to request more information about errors and dispute problems with it.
Even though we might wish that we could bury our heads in the sand and our problems will go away, this unfortunately isn’t the case. Ignoring debt collectors won’t make them go away.
You do have legal protections – the Consumer Financial Protection Bureau and the Federal Trade Commission, as well as the Fair Debt Collection Practices Act (FDCPA) have strict rules that debt collection agencies must follow.
Filing for bankruptcy, whether Chapter 7 or Chapter 13, can also help protect you from collection companies. Once you file, all collection activities, including phone calls and wage garnishment must stop. This gives you some breathing room to get your financial life back on track.