July 8, 2019
Debt collection affects millions of Americans, Tom. For several years the number of households who had accounts in collection was in decline, as many households embraced more responsible financial practices in the wake of the financial crisis. However, recently we have seen this trend reverse. Over 25 million Americans had debts under collections by a third party according to a Federal Reserve Bank of New York report published in June of 2018. Additionally, we have seen debt collection tactics change in recent years as agencies have embraced technology and more aggressive legal maneuvers. As a result, debt collection activity is once again on the rise.
If a bill is more than 30 days past due, it will be reported to a credit agency and your creditor will likely contact you regularly asking you to pay the balance, often with a late fee. However, if a creditor has no way of forcing repayment, they will consider it a loss. In order to try to minimize that loss, they will often sell your debt to a collections agency for pennies on the dollar. Once these agencies are entitled to the debt you owe, they can be relentless in their pursuit of it.
As I mentioned, missed payments will be reported to credit bureaus. And because your payment history is the most heavily weighted factor in creating credit scores, missing any payment will do damage to your score. However, once a debt is reported by a creditor as a charge off – a permanent loss – you will have that negative mark on your credit for seven years. Depending on the size of the debt, the damage can range from moderate to very significant.
The main reason is that Americans are racking up debt again. U.S. household debt reached a record $13.67 trillion in the first quarter of this year, according to the Federal Reserve. From student loans to credit cards to auto loans, consumers are living beyond their means again. And more debt means more defaults. In addition, the Trump administration has proposed relaxing some restrictions on debt collectors that were put in place by the Obama administration in the wake of the Great Recession, making it easier for agencies to contact consumers.
As many of us know, the old standby for collection agencies is the phone call. If you have ever had an account in collections, the number of phone calls could be truly overwhelming. But debt collection agencies are increasingly buying older debt and pursuing collection through the courts.
On top of this, collection agency communications are likely to expand beyond calls in the future. However, earlier this year the Consumer Financial Protection Bureau proposed new rules to govern debt collection agencies. Some of the new rules would be positive developments. For example, collection agencies would be barred from making more than seven attempts a week to reach the holder of the debt by phone, and once they do make contact, they would have to wait a week before calling again. However, the new rules would also open up new avenues for agencies to contact you, including email and text message.
The first thing to do is to validate the debt. A debt collector is required by law to send you a debt validation letter – if you request it – that outlines details about the debt being collected, including how much you owe. This letter should verify that you actually owe the debt, that the agency is authorized to collect the debt and that it has the documentation required to prove you owe the money. Additionally, if you do request the debt collector validate the debt, they are required to cease all communication until they have done so. If they fail to validate your debt, you have 30 days to dispute the debt in writing.
If it turns out you do have debt, you can pay the sum or request to work out a payment plan. This is the quickest route to ending the collections calls and beginning to repair your credit. During this process, it is important to document all communications and agreements. If you cannot pay the amount under a payment plan, you can seek assistance with a verified nonprofit credit counseling agency. A good resource for this is the Financial Counseling Association of America.
Just remember the worst thing you can do in this situation is to ignore these collection agencies. The damage to your credit score will cause financial difficulties in other areas of your life, and the interest on the debt and other fees can cost you a lot of money in the long run.
Know your rights. According to the Federal Trade Commission, debt collectors cannot:
- Contact you between 9 p.m. and 8 a.m.
- Contact you at work if you indicated orally or in writing that your employer doesn’t allow you to receive these types of calls
- Contact a third party about you for any reason other than to get your contact information
- Tell a third party that you owe money
- Harass you or anyone they contact about you
- Lie about how much you owe
- Use deceptive methods to collect a debt from you, including claiming to be law enforcement, claiming you’ll be arrested if you don’t pay, using a fake company name and more
- And if the collector contacts you via robocall, a prerecorded voice or an artificial voice, you can revoke your consent to receive such calls.
This information in the Financial Tips section is provided for educational purposes only and is not tax, legal, financial planning or investment advice. You should consult a tax professional. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.