What You Should Know About Debt Collection
Authored By: National Consumer Law Center
This fact sheet provides a summary of your rights when dealing with debt collectors and some guidelines for determining what debts should be given priority in a financial crisis. Even when you do not have the money to pay your bills, you do not have to be subjected to collector pressure tactics.
Which debts do I pay first?
You first should use your money to pay for what is most necessary for your family—food, clothing, shelter, and continued utility service. There is very little a debt collector can actually do to you, so don’t let debt collection efforts affect your decision about which debts to pay first. Don’t give much weight to threats to bring suit, seize household goods, or garnish wages unless you get court papers in a lawsuit that has actually been filed.
Some general rules for setting payment priorities are:
- Make Mortgage and rent payments first.
- Make whatever payments are necessary to insure essential utility service is not disconnected. The utility company may not require payment in full even if you are behind.
- Pay on a car loan after critical items (food, rent, clothing), but before most other debts for nonessentials.
- Generally, pay loans with only household goods as collateral only after more pressing debts.
- Give low priority to paying debts that do not have property pledged as collateral, such as credit cards, doctor and hospital bills, and accounts with merchants.
- The threat of a lawsuit should not raise the priority of a debt above that of a mortgage, rent, utility payments, or a car loan.
- Do not pay those debts that you have a good legal reason not to pay, such as when the car you borrowed money for is a lemon. Instead, seek legal advice as to how to best fight for your rights.
- When a creditor wins a lawsuit, your home and other assets may be at risk, depending on the amount of your equity in the property. If the property is truly at risk, make this a high priority debt.
- Pay tax liabilities and student loans ahead of low priority but after top priority debts.
Dealing with Debt Collectors
Once you have decided which debts you are able to pay and which will have to wait, the next step is to deal with the collectors that aren’t being paid first.
How should I deal with collectors?
Don’t let them pressure you into making the wrong choices about what to pay first. Explain to the debt collector, “I have to pay my rent and utility bills first. I have recently been laid-off. When I get a new job I will do my best to meet my credit card debt. I will pay you when I can.”
What can a debt collector really do?
A debt collector collecting a debt of the creditor can do little more than demand payment. If the creditor has not taken your house, car, or other property as collateral on a loan, then legally the creditor can only do three things:
- Stop doing business with you.
- Report your default to a credit bureau (which will be unavoidable when you cannot pay most of your debts on time.)
- Sue you in court. Although the threat to sue you may be very upsetting, it is not nearly as serious as you might think.
Many creditors don’t follow through on their threats. If they do sue you, you can represent yourself and explain why you cannot or should not pay. After a period of time, the creditor may obtain a court judgment, but this judgment still does not force you to pay the debt. It only gives the creditor the right to try to seize part of your wages or get some of your property. If you do not own very much or if you do not earn very much, even with a court judgment creditors will not be able to seize any of your property or wages. Creditors can never seize wages or property before a judgment, nor can they send you to jail or send your children to foster care.
How can I stop being harassed?
Federal law prohibits harassment by collection agencies or lawyers. For example, they may not contact you at unreasonable hours: before 8 a.m. or after 9 p.m., unless you give your permission. They also may not use obscene or profane language or call you constantly to annoy you. Some states also have laws that provide similar protection against creditors.
Consumers being harassed by debt collectors should follow these eight steps:
1. Head off harassment before it starts. When financial setbacks prevent you from paying all your bills, call the creditor and explain your situation. Explain that you have to pay the landlord and utilities first and that you will pay your other bills when you can. Don’t over promise; it’s better to be realistic about your prospects for paying. By contacting the creditor first, you may avoid having the debt turned over to a collection agency, which will usually be less flexible than the creditor in working out a payment plan.
2. Write a cease letter. If explaining the situation doesn’t stop collection efforts, the simplest way to stop contacts is to write the collector a cease letter. Federal law requires collection agencies to stop dunning after they receive a written request to stop. It’s a good idea to include in the letter why you can’t pay right now and what your expectations are for the future, though this is not necessary. You should also note in the letter any billing errors and/or abusive tactics debt collectors have used in their contacts with you. Be sure to keep a copy of the letter. Below is a sample letter:
[name of collection agency]
Dear Sir or Madam:
I am writing to request that you stop communications to be about my account number ______ with [name of creditor] as required by the Fair Debt Collection Practices Act 15 U.S.C. § 1692c(c).
[Describe any harassing contact by the collection agency. If appropriate, provide information about why you cannot pay the bill or do not owe the money.]
This letter is not meant in any way to be an acknowledgement that I owe this money. I will take care of this matter when I can. Your cooperation will be appreciated.
3. Have a lawyer write a cease letter. You don’t need a lawyer to write a cease letter, but if your letter does not stop the harassment, a letter from a lawyer usually will. Also, collection agencies must stop contacting you once they know you are represented by a lawyer.
4. Work out a payment plan. If you decide to work out a payment plan, you should only agree to a realistic plan, preferably one that significantly reduces the debt. In making any agreement, keep in mind your priorities: don’t make even small payments if the payments would prevent you from paying your mortgage or rent, food, or utilities.
5. Complain about billing errors. Collection letters are sometimes in error. If a letter contains a mistake, you should write and request a correction. Keep a copy of your request. If you dispute the debt in writing within 30 days of your receiving notice of the right to dispute, the collection agency must investigate. It must stop collection efforts while it investigates. If the account is an open-end account, like a credit card, you can dispute a charge within 60 days of receiving the bill.
6. Complain to a government agency. Mail any complaint you have about a collector’s conduct to the Consumer Response Center, Federal Trade Commission, CRC-240, Washington, DC 20580, to the consumer protection division within your state attorney general’s office, and to any local office of consumer protection. You should be able to obtain these addresses from your local Better Business Bureau or office of consumer affairs. Send a copy of the letter to the collector and keep a copy.
7. File bankruptcy. Filing bankruptcy will instantly stop all debt collection efforts of any kind. Often, simpler and less expensive action will resolve debt collection harassment, but bankruptcy filing may provide you significant other advantages. Do not decide casually to file bankruptcy. Consult a competent professional before starting any bankruptcy.
8. Sue the debt collector. The federal Fair Debt Collection Practices Act allows you to sue debt collectors who violate the Act’s provisions. If you win, you can get statutory damages up to $1,000, actual damages, costs, and attorney’s fees. Consult a lawyer to discuss such litigation.
Reviewed February 2012
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