The Urban Institute estimates that 28% of Americans have debt in collections.
Most of that debt comes from either medical bills or credit cards.
In Hampden county, MA, 32% of all residents have debt in collections. In non-white residents, that number is 54%.
Debt collection affects a giant portion of Americans.
Debt collectors have the ability to attach your wages, ruin your credit, or force you into bankruptcy. Alternatively, some people use credit repair companies.
How did we get here? How does it work and what can you do to stop it?
Types Of Debt
A “creditor” is a person who loans money, a “debtor” is a person who borrows.
There are two primary types of debt, “secured” debt and “unsecured” debt.
Secured debt just means that the creditor has attached a legal property interest to whatever they loaned you the money for, giving them the right to reposses the item if need be. For example, a bank has a secured interest on your house. A bank is legally allowed to foreclose or reposess your house if you stop making payments.
When you lease a car, those dealerships file the appropriate documentation to give themselves a legal right to reposess your car if you stop paying.
Those are the most common types of secured debt – cars, houses, major purchases involving equipment or machinery, etc.
Unsecured debt is that which cannot be repossed by legal right. For example, credit cards.
When you open a credit card at Macy’s, they don’t go through the legal process of gaining a secured interest on the money. It would be a nonsensical and time consuming option for them for many reasons.
The difference between the two debts is this: if you discharge secured debt, or try to get out of it, the creditor will always have the right to reposess whatever they have an interest on. So yes, you can get out of your mortgage payments, but the bank will take your house. Yes, you can stop paying your car note, but you’ll lose your car.
With unsecured debts, there are ways to discharge it and not have any of your stuff taken away from you.
The Debt Buying Industry
When you get a credit card, you and the creditor (Macy’s, Capital One, etc) enter into a legal contract where you receive money NOW in exchange for a promise to repay the creditor over time, including interest.
Like other contracts, credit contracts have little value if they cannot be enforced.
Creditors use debt collection to recover funds when you don’t repay what you owe.
Debt collection helps reduce creditors’ losses by buying debts and trying to get what they can for them.
Here’s how it works:
STEP 1
You get a credit card at Macy’s. You spend $2,000 and you never pay it back. Macy’s sends you letters and you never respond.
STEP 2
Lets say Macy’s has one million credit cards open, and 25% of the accounts don’t pay the money back. You don’t make payments so you fall into that 25%.
The only way Macy’s can force you to pay them is with a judgment from a court.
Macy’s can harass you and send you all the letters they want. But this is no different than any other civil lawsuit, Macy’s must prove you owe the debt, sue you and get a “judgment” from a court (meaning a judge orders you to pay), in order to force you to pay your debt back. Once they get a judgment they can attach your wages and take payments out of your paycheck every week.
STEP 3
Instead of Macy’s hiring a full staff of attorneys to sue and collect money on debt, Macy’s sells your debt in a package to debt buyers.
Sometimes companies will hire a third party to collect the debt, but large creditors often sell them to debt buyers.
Owners of debt create, market, offer, and sell portfolios of debt. Debt buyers identify, bid for, and purchase these portfolios. Purchase and sale agreements set forth the terms under which owners of debt sell debt portfolios to debt buyers.
Among other things, these contracts state the information that owners of debt provide to debt buyers at the time of sale, as well as the information that debt buyers may obtain from them and on what terms after the time of sale.
Debts sold by original creditors are typically bundled into portfolios. Debts within original creditor portfolios generally share common attributes, such as the type of credit issued, the elapsed time since the consumer accounts went into default, and the number of third-party debt collection firms with which creditors placed the accounts prior to the creditors offering them for sale. Other debt sellers may create portfolios with debts where the debtors share common features. For instance, some portfolios contain only debts from debtors with recent credit scores within a given range, or debtors whose last known address was within particular states.
Also, after the passage of time, banks must “charge off” credit card debts to complywith federal banking regulations. Federal regulations prohibit banks and other depository institutions from counting toward their capital requirements debts that are in bankruptcy or delinquent more than a specified number of days. This is another enticing reason for banks to pursue debt selling.
So the bank, or whoever the creditor is, ends up selling your debt, for pennies on the dollar. A debt portfolio of 2,000 accounts worth $1m in total debt, may get sold to a debt collector for $50,000.
Now the debt collector pursues you and tries to get what they can.
STEP 4
Once the debt collector buys your debt, they’ll either sue you in small claims court and try to get a judgment so they can attach your wages, or, they’ll work out some sort of payment plan with you where they may continue to charge you interest thus perpetuating your debt. Note: they can try attaching your house too, but that’s usually avoided with a homestead exemption.What’s worse, is even putting money into a trust might not help you.
Here’s the most important thing in this blog: if they sue you, they need to prove you owe the debt. Because they buy these debt accounts in bulk, often times they are never given the names or addresses or any identifying information about the account holders.
Always ask for a validation of the debt. You are LEGALLY ENTITLED to this information. They may then show you some balance sheets and transation histories, but often times those documents don’t have any names or identifying information about you on them.
Always review those documents thoroughly and if you don’t see identifying information about you, it will get dropped in court.
Debt buyers bank on 90% of people not fighting them. For 90% of people who don’t even show up to court, the debt collectors win. For the 10% who are proactive and take a stand against the debt, these collectors run into big problems that they don’t have time to deal with.
They’d rather collect on 90% of the accounts and take the 10% as a loss than focus on running their operations more diligently.
Things to remember:
- Never admit you owe the debt.
- Contact an attorney
- Ask for the validation of the debt
- If they can’t show you validation, or if there’s no identifying info, ask the judge to drop the case.
Helpful Materials
You should not be billed for something you didn’t buy or for something you already paid for, but mistakes can happen. If you don’t think you owe the debt, first find out if you are being billed by a creditor or a by collection agency.
If it is a creditor: You have the right to disagree with (or dispute) the charge. There should be instructions for filing a dispute on back of your monthly statement. It is best to write a letter (see Letter A below). Circle the items on your monthly statement that you disagree with and include a copy of that statement with your letter.
If it is a collection agency: Write a letter to the collection agency telling them that you don’t owe the debt. They must stop contacting you until they send you proof of what they say you owe. Use Letter A below.
If the collection agency sends proof of the money they say you owe but you think it is wrong, send them another letter along with
- proof that you paid, or
- an explanation about why you think the debt is not yours.
If they don’t send proof that you owe the debt, you do not need to do anything. They must stop contacting you.
Letter A
[Your address]
[Today’s date]
[Name and address of creditor or collection agency]
Re: Billing Error Notice – Account Number: [account number]
To Whom it May Concern:
I have received your bill regarding an overdue amount for [the item(s) you were billed for].
[Pick one or more of the following:]
- I have paid this bill in full.
- I have paid part of this bill and I owe [amount].
- I have not paid this bill because [reason].
Please check your records and correct my account. Also, please do not send me any more bills or call me until this matter is settled.
Sincerely,
[Your signature, date, and printed name]
What if I owe the debt but I cannot afford to pay it?
Debt collectors will try to pressure you into agreeing to pay more than you can afford.
If you cannot afford to pay the full amount, send the amount you can afford every month, even if they say it is not enough. If you make a payment each month, it may stop them from suing you for the full amount of the debt.
If you cannot afford to pay anything and you want them to stop contacting you, send them a letter that looks like Letter B. Include your account number and make a copy of the letter for your records. Once they get your letter, a creditor is still allowed to contact you, but often they will stop. A collection agency is only allowed to contact you to tell you what they will do next. For example, they may say they will sue you in court or that they won’t contact you again.
Remember, you still owe the money even if they stop contacting you. They can sue you to try to collect the debt you owe.
Letter B
[Your address]
[Today’s date]
[Name and address of creditor or collection agency]
Re: Contact Request – Account Number: [account number]
To Whom it May Concern:
This letter is to notify you that I do not wish for you to call, write, or visit me at home or work about the money you claim I owe.
Sincerely,
[Your signature, date, and printed name]
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