How to deal with debt collectors

This article had to be revamped big time.


Don't get me wrong, it wasn't terrible. It actually had what I consider to be a nice lead-in, with good segues to the major points of debt collection. It was a very soft-peddle approach.


But in light of recent events, it all just seemed hokey -- not to mention disheartening. So I say we break things down to the brass tacks, eh?


These days, it seems like "debt collection" doesn't have the same gravitas as when I was younger. Perhaps it's nostalgia, where some things loom larger than life. Perhaps it speaks to my comfortably middle-class upbringing -- not paying one's debts was simply unthinkable -- or maybe people were already too comfortable with living above their means, even before the current economic crisis. Whatever the reason, the term that used to seem ominous has apparently become rather commonplace. It's lost its power.


Part of this has to do with a surge in the number of collections agencies. New companies have cropped up over the last few years, which is also where a lot of the problems come from.


Let's start with one of the biggest ones: They're chasing after a debt that isn't yours.


This happens more often than you might think. There are plenty of tales of people having their credit ruined by over-zealous collectors with the wrong leads, wrong names or just wrong information.


Perhaps the worst part about this problem is that it's often so easy to see there has been a mistake. I remember one anecdote: A company was harassing a woman over a small business loan taken out in another state. Except that she had never left her home state and had been steadily employed as a teacher while this debt was incurred. But the company claimed she had to prove it wasn't hers. (Not true.)


So, just in case some of you haven't actually dealt with collections before, let's go over some basic rules.



First a quick primer on debt


Once you incur debt, most companies will wait at least 60 days -- more often 90 or more -- before sending an account to collections. At the 60 day mark, the company will contact you (and, often, the credit bureaus), reminding you that it hasn't received a payment and threatening collections.


The representative will tell you that the account is about to be "charged off." This sounds pretty scary, but actually it means the company is officially giving up on you. The good news: It won't hassle you anymore. The bad news: The credit bureaus have already been notified. The collections agencies will start contacting you.


Some agencies will contact you first by letter. Legally, they must send you a letter within five days of contacting you by phone. But some companies ignore this rule. After all, if you don't have a letter, it's harder to complain about a specific company's harassment. (Many of the less scrupulous will avoid saying the name of the company when they call.)



Rule 1: Never accept responsibility


Much like a car accident, you should never, ever admit fault. As soon as you accept a debt as your own, the company has a good basis for asserting the legitimacy of its efforts.


This rule can be one of the hardest to remember. Often, you're dealing with debts you incurred years before. The company has exact figures on its side. It has your social security number. And the agent just sounds so sure. How can it not be true?


Pressure doesn't help memory. We all know that. So just flat out refuse to accept the debt as your own until the agency provides proof. Once you've had a few hours to think about it, you may remember details that prove the debt isn't yours.


But chances are, none of those facts will line up in your head while some guy is telling you all sorts of dire consequences. So just air on the side of caution, and don't admit to any responsibility.


Remember, these guys do this for a living. They have encountered all sorts of counter-arguments. They're prepared. You're not.


Instead, tell the agent you need to see proof that this is your debt. Until you see the evidence you requested, legally the company cannot take action. If it does, it's opening itself up to some nasty lawsuits.



Rule 2: Never make a payment

Unless you are 100% certain that this is a debt you created, do not -- under any circumstances -- agree to a payment. Even if it's just a few dollars. Even if it's one dollar.


One of the oldest tricks in the book is to offer you a very enticing settlement, either in writing or on the phone. Often, these communications offer to take up to 60% off the amount owed. This could be tempting, especially if you're pretty sure the debt is yours.


Other times, the agent will offer to let you just make a small payment -- a show of good faith, then he'll leave you alone. If you're tired, distracted or stressed, this can seem pretty appealing.


Do. not. take. the bait.


Because that's exactly what it is. The agent uses these offers to hook you. Getting you to make a payment -- even $1 -- accomplishes that.


Why? Because any payment on a debt restarts the clock on the statute of limitations.


Each state has a statute of limitations on debt. Usually between 4-6 years, the statute means you cannot legally be forced to pay debts beyond this point. (The notable exception to this is a federal student loan or an IRS debt. Those almost never go away.) So once the 3-6 years is up, you are no longer responsible for paying back the debt.


Unless, of course, you make a payment. Then, you're on the hook again for another 3-6 years.


So how do you know if it's past the statute of limitations? Well, first, check find out what your state's magic number is.


But there is another good way to sniff out a soon-to-elapse debt. When a collections company suddenly starts contacting you with promises of severely reduced amounts, it's a good guess that they're desperate to collect before time runs out.


See, collections agencies pay pennies on the dollar for the charged off accounts. And their people work mostly, if not completely, on commission. So if they're suddenly willing to take thousands of dollars less than what you owe, it's usually their last shot at payment.


An aside:

Let me just say, I firmly believe that people should pay off the debts they create. I think this nation would be in much better financial shape if this were the guiding principle. Instead, I see an awful lot of Americans talk about bankruptcy as casually as a dentist appoint: Not something they love to do, but easy and relatively harmless.


So, please, don't use the statute of limitations on debt for evil. If you can afford to pay off your debt, do it.


But if you are in a financially tight situation -- and that means no savings, no lattes, no nothing -- then you should check your state's law before making any kind of deal with a debt collector.



Rule 3: Don't assume being innocent will protect you


So you get a letter from a debt collection company. You know it's not your debt. You weren't even in the state when this happened! So you can just toss the letter and go on about your merry way, right?


Wrong.


Ignoring a debt collections letter is as good as giving the agency a green light. You have to refute your responsibility in writing. You need to put in a letter that this debt is not your debt and you will not accept responsibility for it.


Once the company receives this notice, it may not contact you further about the debt until it has furnished proof -- usually in the form of a debt report.


When you send the letter, it's a good idea to use tracking confirmation and/or return-receipt request. This way, you have evidence that the letter was, in fact, received by the company.



Rule 4: Don't assume that having paid off/refuted a debt will protect you


Liz Pulliam Weston talks a lot about zombie debt. This is debt that won't die. You can pay it off, or even successfully refute that it's yours, but you'll probably hear about it again.


If you know this isn't your debt or that the statute of limitations is up, it may be in your best interest to hang up. At most, you should state that the statute of limitations is over/the debt is not yours/you have paid that debt. But, really, if you say nothing, then the company has nothing to use against you.


Should the company keep contacting you, it's a good idea to go ahead and send a letter again, asking for the collections attempt to cease and desist.

Rule 5: Know your rights


You have rights under the Fair Debt Collection Practices Act. It's important that you know what they are.


For example, a debt collector may not use profanity or threats. This happens more often than you might expect. I suppose it's the idea of obedience through fear. It's yet another reason that some agents avoid mentioning their company name. You can't report them if you don't know who called you.


Debt collectors cannot contact you at obviously inconvenient times, such as before 8 a.m. and after 9 p.m. They must also stop calling at work if you make it clear that your employer disapproves of your receiving calls there.


They may not threaten to have you arrested, exaggerate the amount owed, or otherwise make false statements.


Because these practices do happen, it's important to keep a log as soon as a debt collector contacts you. Be sure to get the name of the company and the agent. Note the date and time, as well as contact method. Summarize what was communicated to you, along with any response you make.


If the agency continues to abuse your rights after you've asserted them, contact your state's Attorney General and/or the FTC. These entities can give you a better idea of how to proceed, including whether you should engage a lawyer. (If you win a lawsuit, you are entitled to damages and up to $1,000. The Act does not specify, but in some cases, the plaintiff has been awarded $1,000 per contact that is in violation.)



I hope that answers some questions about debt collections. Feel free to chime in with your own advice and/or experience with debt collectors. If there's something I left out, feel free to ask!

Do you hear that big, cosmic chortle?

One of the axioms I find myself repeating a lot lately is "If you want to make God laugh, tell Him your plans."


I've talked before about how easily a budget can be upset by unexpected expenses. In fact, the tighter the budget, the more easily a small item can completely turn your plans upside down. So it should come as no surprise that Tim and I are constantly revamping our outlook. We try to roll with the punches as best we can -- because the punches they keep a'comin'.


So why am I talking about this now?


Well, just the other day, Tim got a call from a debt collection agency. It's not an uncommon occurrence. Companies get some information -- sometimes outdated -- and go to work on the folks most likely to pay up.


It was an excellent reminder to do a piece about dealing with debt collectors. Some people have problems with harassing phone calls regarding past-due accounts. Others are bewildered by the same calls, but about debts that they didn't incur.


And so, in starting a post about that very subject, I seemed to have set in motion some epic, Rube-Goldberg-style mechanism. Witness the marble slide down the chute, knock over some dominoes, which push down a lever... You get the idea.


The end result was a letter from the IRS, received today, informing us that our refund was being withheld. It would be used as an offset against Tim's defaulted student loan.


Fascinating, since we finished paying the suckers off in early October.


So we called the Department of Education. It took several tries to figure out the right combination to get to an actual operator.


Apparently, we only paid off 2 out of 3 loans that Tim took out. The loan was assigned to the wrong Social Security number. Which means that, when we called two years ago and said we wanted to rehabilitate Tim's loans, there were only two on record. Those two got rehabbed.


Meanwhile, whoever got assigned Tim's third loan went through a dispute with the Dept of Education. An investigation was started, and they eventually concluded it was Tim's. So they assigned it to his social security number.


But by this point, his account was in good standing with the other two loans having been rehabbed. And the people who send out the ominous letters about defaulted loans don't check accounts in good standing.


So when we paid off the loans, apparently we finally -- in the last five months -- came to the attention of the Department of Education once more. But since it was so long defaulted (Tim went to school in 1999, graduated in 2000) no letters were sent, no calls made. We were just sent to collections.


As you can imagine, this kind of mind-boggling bureaucracy gave us both headaches. But the operator saw nothing strange about this cycle. I argued that we had made a good-faith effort to deal with Tim's outstanding debts, yet we were being penalized. Mainly for taking the government at its word. The guy simply replied that in each promissory note, the lender agrees to keep track of his/her own debts. Essentially, the operator said, it's not the government's responsibility to notify us about these things.


On the one hand, I agree -- if you take out debts, you need to be responsible and pay them back. And that means knowing what (and who) you owe.


On the other hand, it seems like the government does keep pretty detailed tabs on the status of various loans. It's certainly pretty active in sending updates/bills/declarations of defaults to most of the people who owe the department money. Which leads me to think it really just has that clause in promissory notes to give itself a loophole in situations like this.


So essentially the message is: "We will follow you closely to be sure we get our money back. We'll send you monthly bills and updates on your payments -- including how much is applied to principal vs interest. But just in case we're wrong and have been attempting to collect from some poor American who doesn't owe us money, we reserve the right to blame you and charge you interest for that entire time that we thought the loan was someone else's."


It seems like a pretty ridiculous set of circumstances, made worse by the dueling opinions in my head.


One side points out that taking on a debt should be a bigger deal in this country -- and it's a little ridiculous how many people owe money and don't even know it. Just because it's my husband, shouldn't excuse the fact that we should know exactly what he had taken out.


The other side says, sure that's true. But...

1. When the entity you owe money to states that you owe it $X, it's pretty reasonable to then assume you don't owe them $X plus $Y that it's forgetting about. Especially when the entity has a vast, computerized database.
2. Even if we had known about the third loan, wouldn't we have just assumed it was somehow lumped into one of the two other numbers -- because, again, the government would know what we owe it better than we do?
3. Even if we figured out the government had forgotten about it, what are the chances we would have wanted to risk asking about the loan? (I'm not saying it's right, but more than likely we would have just crossed our fingers and hoped we'd heard the last of it.)
4. Should we really have to pay interest on the last 2 years, when the loan wasn't technically on Tim's account or even tied to his social security number?
5. Once the account went from good standing/paid off to default/not goodstanding, shouldn't the Dept of Education have bothered to -- oh, I don't know -- inform us that the status had changed and give us time to respond before sending us to collections?
6. If a loan has been erroneously assigned to someone else, shouldn't the investigators just take a few minutes to type up a letter to the original borrower? If it wasn't tied to his social security number, after all, there's no way for him to make a payment. Ergo, he'd need to be notified, right?

But the other side just keeps repeating that it really is the borrower's responsibility to keep track of what he has borrowed.


So I don't quite know what to think. I'm disheartened and Tim is pretty devastated. He felt so free finally putting those student loans behind him. They had loomed so large for so many years, while he struggled to keep any job around his health problems.


And there's not a whole lot we can do. I asked the operator for a copy of the promissory note. That will take 2-3 weeks to get here. (I searched through Tim's papers and found a Direct Loan document that appears to match up with the alleged loan, but I want to see his signature on that piece of paper.)


I also touched base with the collections agency. I explained that we had just received all this news today, were pretty upset and generally confused. As far as we knew, we had completely paid off Tim's loans. My blood sugar was low and I was a little emotionally punch-drunk, so I spilled out our sob story -- combined monthly income of $3,100, rent of $700, insurance of $500, and credit card debt (mostly from medical-type expenses) of $8,000.


I made sure to mention that we could not acknowledge this debt as belonging to Tim until we had a copy of the promissory note in hand. But I wanted to know, if this proved to be a valid debt, what sort of plan we were expected to adhere to.


The agent was actually very kind (of course, most are to crying females but it's still nice) and took all this information into account. He agreed that any payment could wait until we had proof that this was Tim's loan. Additionally, he gave us the lowest payment option -- $51/month for 9 months. After that point, the loan would be considered rehabilitated and the collection fees would be dropped.


So this is more of a emotional than financial blow.


We don't have the money sitting around, obviously. But it was relatively small as student loans go: $2,625 at 6.96% became $4692.21 over the last 10 years. Once our withheld tax return gets applied, it'll be just about $4100. The 9 monthly payments will take it down to about $3650. Then the collection fees ($917) will be dropped, taking it down to just about $2700. Or about the amount Tim borrowed... allegedly.


Still, the emotional impact was pretty big. We thought we had closed the book on one section of our debt. We thought we were on track to just pay down this credit card debt, after which we'd be done with interest-bearing loans.


But, besides calling and arguing the case (probably without any results) with the Department of Education, what can we do?


We can suck it up and pay it down. We can use this as an object lesson in organization and thorough research. We can realize that it's definitely a step backward, but that we're still making good progress.


We can remind ourselves that this sort of thing is why we always have to be careful -- with our money and the plans for our money. Relying on a smooth ride is generally the best way to find yourself with a flat tire -- and no spare in the trunk.


And finally, we can hope that God (or fate or whatever entity you believe in) got a nice, deep guffaw out of this one. Because if we can't keep our deities entertained, really what's the point?





For those of you still interested in the "how to" of dealing with debt collections, the post will be out on Thursday.