Dealing with Debt Collectors

Dealing with Debt Collectors: Debt Collector Law

Do not let debt collectors push you around. It is the job of some bill collectors to persuade you to pay the wrong bills first and to refinance bills that should not be refinanced.

Remember the cardinal rule about debt collectors: unless they work for your landlord, utility, mortgage holder or other secured creditor, they often have no bite behind their bark. Do not let debt collection harassment force you into making wrong decisions that will hurt you later. If a certain bill is less important, explain to a creditor why you are not paying and when you propose to pay:

Example: "I have to pay my rent and utility bills first. I just got laid off but when I get a new job I will do my best to meet my credit card debt. I understand that you will want to cancel my card, and I will pay you when I can."

If the creditor or a bill collector still calls at all hours and writes threatening letters, use the tips below to stop debt collection harassment.

Debt collectors cannot legally do much to collect on unsecured debts
Debt collectors are experts at making threats about the dire consequences of nonpayment. It is important to know what a debt collector can and cannot legally do when you get behind on a particular debt. Most debts, such as virtually all credit card obligations, doctor bills, small amounts owed merchants and many small loans are "unsecured." This means you have not put up any collateral, such as the family home or car, to secure the loan's repayment.

An unsecured creditor can legally take only the following three actions against you when you get behind on a debt:

1. Stop doing business with you
2. Report a default to a credit bureau
3. Sue on the past due debt

Threats to do anything else on an unsecured debt are deceptive and violate federal law. The collector cannot seize your wages or property before the creditor has obtained a court judgment, nor can it send you to jail or send your children to foster care. Additionally, collectors cannot publish your name in a newspaper, report a debt to your neighbors, or seek to collect from other family members unless they cosigned the debt or a court order is entered that makes the family member responsible.

You can read more below about the three actions an unsecured creditor can take against you when you get behind on a debt:

1. A creditor may stop doing business with you. For example, a credit card issuer can cancel your card or a dentist to whom you owe money might refuse to let you continue as a patient. Usually, though, there are other merchants or professionals who will offer the same goods or services on a cash basis or even on credit. The threat of stopping business with you is only serious where a particular creditor has a monopoly in your community, such as the only doctor in a rural area. Utilities also usually have a monopoly.
   
2. A creditor may report the default to a credit reporting agency. The fact that you are behind on your bills almost certainly will end up on your credit record. You cannot stop this, short of always being current on all of your bills. While this is unfortunate, you only make matters worse by paying a particular bill first just because that collector is threatening to ruin your credit record.
   
   The reason you make matters worse is that the collection agency threatening to ruin your credit is almost always bluffing. If a creditor routinely reports delinquent debts to a credit bureau, your delinquency is already noted in your credit record even before the collector starts making threats. If the creditor does not normally report information to a credit bureau, collectors who threaten you almost never go to the bother of doing so themselves.
   
   Many creditors never threaten to ruin your credit record. However, they automatically report to a credit bureau by computer every payment and delinquency on a monthly basis. So if you pay a creditor that threatens you rather than one that does not, you may end up with a problem on your credit record anyway.
   
3. A creditor may begin a lawsuit to collect the debt. Starting a lawsuit against you is the threat that may worry you the most. But there are four reasons why the threat of a lawsuit is far less serious than you imagine.
   
   First, it is hard to predict whether a particular creditor will actually sue on a past due debt. It is expensive to take you to court. Many creditors will not do so for small debts, say under $1,000, although some creditors do take even small debts to court. Still other creditors do not take even large debts to court. How aggressively a collection agency threatens suit is no indication of whether the creditor will actually sue, even if the threat appears to come from an attorney.
   
   Second, if the creditor does decide to sue you, you have a right to respond and explain why the money is not owed. Do not let the creditor win by default. You do not have to hire an attorney to respond to the lawsuit. Often when a creditor sees that you will contest the action, it will stop pursuing the lawsuit.
   
   Third, even if the creditor does pursue the lawsuit and eventually wins, the worst that can happen is that a court judgment will be entered against you. You will not automatically be in contempt of court for failure to pay the judgment. The judgment only gives the creditor the legal right to try to seize your property, to garnish your wages or to seek a court order requiring payment.
   
   Fourth, if you are "judgment proof," you have nothing to fear from even these special collection techniques. You are "judgment proof" if all your assets and income are protected by law from a creditor trying to enforce a court judgment.
   
   State exemption laws usually protect a certain amount of your property from seizure pursuant to a court judgment. A local legal services program, an attorney or a credit counseling agency can provide a list of exempt property in your state and advise whether your state's law allows your home or any other valuable property to be taken and sold by a creditor with a judgment against you. Often the information is also available in pamphlet form.
   
   To be judgment-proof, your wages or other income must also be exempt from seizure. Federal law limits the amount of wages that a creditor can seize. The first $154.50 a week of take-home pay is protected, and only a portion of the amount over $154.50 can be seized. Your state's law may supplement this protection. In certain states no wages can be garnished at all. In other states more than the first $154.50 is protected.
   
   Finally, Social Security and other government benefits cannot be seized at all. For these reasons, the threat of a court action on an unsecured debt is not nearly as real or dangerous as the threat of a landlord's eviction action, a bank's foreclosure on a mortgage, a car's repossession or a utility's termination of gas or electricity service. These latter four actions usually happen quickly with a minimum of legal process and expense to the creditor.

Dealing with guilt feelings
You are not a deadbeat when circumstances outside your control prevent you from paying your debts. If you have excess debt burdens, you must repay your most important debts first, and postpone payment of other debts.

Believe it or not, the collector knows this even better than you. Creditors know from long experience that most people pay their bills and, when they do not, it is because of job loss, illness, divorce or other unexpected events. Creditors take this risk of default into account when they set the interest rate--creditors make enough money off you and others in good times so that when you default, the creditor is covered.

Do not be fooled by collector statements to the contrary. Debt collectors are instructed to ignore your reasons for falling behind on your debts, to show no sympathy and not to listen to reason.

You have no moral obligation to pay one debt before you pay another debt, particularly where the debt you pay is more central to your family's survival. Creditors know this. They should not be rewarded for trying to pressure you to pay them off at the expense of another creditor or more importantly at the expense of your family.