Debt Consolidation .bz Blog – Collection of Old Debts

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Collection of Old Defaulted DebtsIt may be the name and primary focus of our site, but as you will see us constantly mention, debt consolidation is not always the best choice for every person with too much debt. This is because each individual’s situation is unique, and it is why there are so many approaches for helping consumers to get out of debt legally. There are also plenty of unethical, and outright illegal, ways to eliminate debt. We will not even cover any of those here, unless it concerns a commonly used deceptive practice designed to fool consumers into thinking they are not doing anything wrong. The best way to ethically and legally eliminate debt has always been… drum roll, please… to pay it off. One major exception, of course, is some sort of fraud or deceptive practice on the part of the creditor / lender or third-party collector. And, in that regard, consumers are not without certain protections under the law.

Please keep in mind that that the following is not legal advice and should not be taken as such. We simply want you to be aware that there may be existing laws put in place to help you deal with your debt in ways that you may not already be aware. Knowledge is definitely power. Determining if and how they apply to your personal situation is going to be up to you. As much as we would like to help with specifics, we cannot. Each state’s laws on this subject are different, and because new court interpretations are being issued on a regular basis, we will only discuss these issues in broad terms. You will need to take it a step further and research the applicable state laws, or obtain qualified legal assistance in order to determine if they apply to your situation. Incurring the expense of an attorney may not seem ideal, however, paying some money now is much better than paying a lot more in the future because of a mistaken interpretation of the law. Ignorance of the law will rarely earn you any breaks from its consequences. In addition, you should also consider checking with your state’s consumer protection division to find out what help they, or other state departments, may be able to provide. Finally, nothing presented here in this article takes the filing of bankruptcy into consideration. Bankruptcy is a completely different scenario, and how it affects the debts that you owe is the topic for a separate conversation.

First of all, you should know that it may not always be necessary for you to completely resolve issues regarding your old unpaid credit card bills and other debts. And, you may not need the help of credit counseling companies, loans or other common forms of assisted debt relief that you see advertised everywhere, including on this website. If you have an old, written off debt, and you are unable to repay it or do not feel a moral obligation to do so, then paying some attention to the applicable statute of limitations may be an attractive option for you. You may still owe the debt, but you may be under no legal obligation to repay it. Understandably, this may come across as a little confusing. How can you still owe money, but not legally be required to pay it back? Well, for starters, this is not a method of debt elimination. The statute of limitations does not invalidate a debt; rather, it simply removes the legal remedies available to a creditor to recover the amount owed. Once a delinquent debt has passed the time allowable by law in your state (let’s assume, six years), a creditor or collections agent is no longer allowed to recover the money owed via lawsuits, wage garnishment or by placing liens on your assets after that six years has passed.[1]

So, what do you do if you are suddenly and unexpectedly “reminded” by a debt collector that you have an outstanding debt from several years ago? Unfortunately for consumers, a current, common practice among cash-strapped creditors is to package up and sell old, written off debt to what are referred to as “debt buyers”; most often, for mere pennies on the dollar.[1] These buyers, comprised of collection agencies and attorneys, are considered “debt collectors” under the Fair Debt Collections Practices Act (FDCPA),[2] as they are not the original creditors and they obtained rights to the debt after it went into default.[i] A creditor can loosely be defined as any person or entity that provides something (whether it be an item or service) to you in exchange for a payment or payments to be made later. The FDCPA is a federal law that is concerned with protecting consumers from deceptive and abusive practices of debt collectors, but does not apply to creditors or their internal collection departments as long as they properly identify themselves.[ii] Refer to the law itself for a complete list of conditions and exceptions. The Indiana Department of Financial Institutions does an excellent job defining the law in simple terms:

“The Fair Debt Collection Practices Act (“FDCPA”) protects consumers from abusive or harassing, false, or misleading, and/or unfair practices of third party debt collectors or attorneys attempting to collect debts incurred for personal, family, or household purposes.”[1]

Please take note that this law only applies to collection efforts of personal consumer debt and does not concern itself with agricultural or business debts. Some other types of debt, such as child support are also excluded.

While debt collectors may contact you about an old debt, they may not actually be able to collect the debt from you through the legal process (as mentioned above). Fortunately, there are rules governing debt collectors’ methods of communication with you and penalties if they deviate from these approved methods.[iii] However, debt collectors are not prohibited from asking you to pay what is owned, once again, as long as they do so in a manner that does not violate the law itself. For example, this could include threatening you with a legal action in order to get you to pay. If a collector threatens you with a lawsuit on a debt that has already exceeded the statute of limitations, then they are most likely in violation of the FDCPA.[1],[iv] In some instances, your state law may offer you greater protection than the FDCPA provides, in which case the state law would still apply. The FDCPA’s intent is to expand consumer protection, not limit it.[v]

There are some points you may want to keep in mind below. Also, we suggest visiting and reviewing the reference sources we have noted, including the law itself, in order to get more information and to determine how the law applies to you and your situation.

  1. The type of contract / agreement or account may affect the period of time allowed by your state of residence’s statute of limitations. Oral and written contracts often have different time limits, with written agreements typically allowing for longer limitations periods. A few examples of oral creditor agreements are: borrowing money from a friend or family member and agreeing on a handshake to pay a handyman once work is complete. [Side note: We strongly recommend against both. Always get agreements in writing. If you think it is odd to sign an agreement with a family member, imagine how you will feel if you end up with different versions of what was agreed upon.] A few examples of written agreements are: auto and personal loans, home mortgages, and open-ended revolving accounts, which include general and private label (store) credit cards. One additional point should be taken into consideration regarding open-ended accounts. With fixed term arrangements the payment schedule is agreed upon in the initial contract, but with open-ended creditor agreements, there is no agreed-upon final payment set in place. Therefore, calculating the time limitations is going to be different with these types of accounts.
  2. The time period covered by the statute of limitations in your state begins at the point in time that state law dictates that it does. This may be written into the law (codified) or have been determined via a court action (case / common law), or both. It is often assumed that the clock starts ticking once the debt has become officially delinquent. The actual calculation is a bit more complex, but (more or less) this is often true. However, you should not assume that this is the case in your situation. You should consult your state law in order to be sure.
  3. Making a payment, transferring the balance owed, or even something as simple as making a promise to pay on these outstanding debts may renew them. Renewing a debt has the effect of resetting the clock on the statute of limitations back at zero. Exactly what a particular state determines to be a valid action in the renewal of a debt, however, may vary. Once again, consult your state law to be sure.
  4. Moving out of the state may allow a creditor the ability to use a longer statute of limitations period. This issue can get pretty complex. But to keep it simple, you should know that if you move to another state before a debt is paid off, the creditor may be able to decide which state’s limitations period should apply for purposes of collecting on that debt.[vi] Once again, research the state law, but in both states. If it is unclear, seek outside assistance.
  5. Creditors may still sue you after the statute of limitations has expired. As mentioned above, it has been held that the FDCPA makes it illegal for debt collectors to sue you over a debt that has passed the limitations period. However, the FDCPA does not apply to creditors, and as such, you are not afforded its protection in this case. This would have to fall to any state law that might apply. Nonetheless, if a creditor attempts to sue you after the statute of limitations has expired, you will have a valid argument / affirmative defense to present in court, and the suit will likely be dismissed.[3]
  6. The allowable time period for using the legal process to collect from you may have passed for a creditor / collection agency, but the debt is still owed.
  • The old debt may be able to be reported to your credit report, making it difficult for you to obtain credit now and in the future.a) However, the debt must be reported correctly.[3],[vii]
    b) The period of time that they may report on this debt is affected by its own statute of limitations period, which is usually longer than the period upon which they can legally collect from you.
  • They can still contact you and ask you to pay, and you can (of course) notify them that you wish for them to stop calling.[viii] Of course, the whole purpose of this article is to get you to be aware of the law and how it protects you. Watch out for deceptive practices designed to trick you into resetting the statute of limitations, thereby opening yourself back up to potential legal action.[1],[ix] Upon being notified of an old debt, do not do or agree to anything until you first make sure that the applicable statute of limitations has not already expired.
  1. Collecting upon a court judgment (obtained on a written off debt) is not the same as merely collecting upon a written off debt. This is an entirely different issue. If you have already been taken to court over an unpaid debt and lost, there is likely a much longer statute of limitations that applies for collection of the judgment. Essentially, the sentiment is, that if a court has taken the time to evaluate your situation and already ruled that you owe on a debt, they expect you to make good on it. Consult your state law if this is the case.

To sum it up, if you are contacted about an old debt, or a creditor or debt collector files suit against you, take the situation seriously. Even if you are right, not dealing with the matter may result in a default judgment being issued against you, and that is certainly not what you want to have happen. Take the time to learn and know your rights!

Reference Sources:

  1. ^ a b c d e Indiana Department of Financial Institutions – “Collection of Old Debts” – http://www.in.gov/dfi/2537.htm.
  2. ^ Cornell University Law School – Legal Information Institute (LII) | Fair Debt Collection Practices Act (FDCPA) – http://www.law.cornell.edu/uscode/15/usc_sec_15_00001692—-000-.html.
  1. ^ § 1692A. Definitions – (6).
  2. ^ § 1692A. Definitions – (4),(6).
  3. ^ § 1692C. Communication in Connection with Debt Collection and § 1692d. Harassment or Abuse.
  4. ^ § 1692E. False or Misleading Representations – (5).
  5. ^ § 1692N. Relation to State Laws.
  6. ^ § 1692I. Legal Actions by Debt Collectors – (a) Venue.
  7. ^ § 1692E. False or Misleading Representations – (8).
  8. ^ § 1692C. Communication in Connection with Debt Collection – (c) Ceasing Communication.
  9. ^ § 1692E. False or Misleading Representations – (10).
  1. ^ a b Neighborhood Economic Development Advocacy Project (NEDAP) – “Debt Collection Basics” – http://www.nedap.org/hotline/dcbasics.html.

Author Information: Jonathan Kolanowski Google+

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