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Credit and Collections 101

Credit & Collections 101: A Consumer's Guide

November 14th, 2007.

Debt has become a fact of life for many Americans. Nearly half of all U.S. adults who have credit cards carry a balance from month to month, which can create a never-ending cycle of debt. In fact, studies show that the average American household carries at least $10,000 in debt at any given time.

Final Notice

Social and cultural trends have certainly contributed to the growing problem of debt in America. The "buy-now-pay-later" attitude popularized by credit card companies, car dealerships and most advertising campaigns are obvious culprits. And increasingly, students graduating from colleges and universities are entering the workforce, determined to have (or at least look like they have) immediate success.

Regardless of the reason, gone are the days of saving up for big-ticket expenses. With current spending trends reflecting a need for instant gratification, most Americans, young and old are learning a lot of bad habits. These habits left unchecked, will eventually lead to major economic burdens and place the goal of financial freedom far out of reach for many.

Ideally, we could avoid debt altogether by developing - and sticking to - a reasonable budgeting plan that allows us to cover all of our monthly expenses and even put money aside each month in savings. Unfortunately, the trends in American spending go in just the opposite direction. We are spending money we don't have, and then we are faced with saving money to pay on the back end. In addition to adding stress and frustration to the mix, this approach to spending also costs us more in the end. Interest - not to mention late fees and other penalties that may be incurred - add up quickly and can sink us even deeper into debt.

Today, nearly half the credit-card carrying population has and maintains a debt balance. As a result, it is very important that we all understand the reality of living with debt and what to do if we are caught in an unfortunate situation and can no longer pay those debts. Information and education are the keys to successfully managing credit and debt.

Credit and Collections Industry 101

In 1978, a statute was added to the Consumer Credit Protections Act. As Title VIII, the Fair Debt Collections Practices Act (FDCPA) protects consumers against unfair tactics and abuses employed by credit collection agencies. Essentially, this statute regulates the way collection agencies can and cannot communicate with people in debt.

The way the credit reporting and collections industries work is simple: creditors use credit reporting agencies to help them determine whether to lend money to consumers, and if so, how much. The main source for commercial credit information is Dun & Bradstreet. Together with the three national credit reporting agencies (Equifax, TransUnion and Experian), Dun & Bradstreet compiles and collects consumer credit information from a variety of sources, including (but not limited to) the following: banks, mortgage bankers and credit card companies. Additionally, there are more than 1,250 consumer credit reporting agencies and another 300 commercial credit reporting agencies nationwide - each of which is affiliated with one or more of the top four mentioned above.

Once the money has been lent, it is the borrower's obligation to repay it. When borrowers cannot or do not pay their debt, lenders turn to the other major component of the industry: credit collections services. While some credit reporting agencies and lenders have their own in-house collections team, often these two areas of the industry are separate and handled by a third-party collection agency.

Collection agencies deal with recouping delinquent mortgage and credit card debt, as well as collecting payments on bounced checks, student loans, child support, and health care debts. Their main tasks include tracking down delinquent debtors (called "skiptracing," which is usually done via the US Postal Service National Change of Address Service) and communicating with debtors in an effort to get the debt repaid (typically through letter writing and phone calls).

There are three main types of collections services: contingency fee collections, receivables outsourcing, and portfolio purchasing. Most collection agencies work on a contingency fee basis, meaning they pursue recuperation of a delinquent loan on behalf of the lender and retain a percentage of all funds recovered as a result of their collection efforts.

Some collection agencies handle all receivables for a given lender, in what is called a "receivables outsourcing" relationship - for a set fee, they handle all receivables transactions for a specific lender or company.

The third type of collections service is called portfolio purchasing, in which the agency purchases an entire portfolio of delinquent loans, and keeps 100 percent of the recovered funds.

The key similarity among all three of these types of collection agencies is this: they are in it to make a profit in a highly lucrative industry - one that boasts annual revenues topping $14 billion.

With so much to be gained, many credit collection agencies have earned a reputation for bullying, harassing, and abusing consumers in order to get debts paid. As a result, the Federal Trade Commission (FTC) continues to amend Title VIII of the Consumer Credit Protections Act (most recently in October 2006) to further strengthen protections for consumers and force collection agencies to act ethically. It's important to know how to deal with collection agencies, what to look out for, and what consumer protection is available.

Dealing with a Collection Agency: Dos and Don'ts

Credit Card Agreement

Do know what you're up against.
The Fair Debt Collections Practices Act outlines specifically what collection agencies can and cannot do when trying to recoup unpaid debts. This constitutes your Debtor's Bill of Rights, discussed in greater detail below. Know your rights and demand to be treated fairly and with respect.

Do act quickly.
While you do have legal recourse when dealing with collection agencies, there is a limited amount of time in which claims can be addressed and disputed. Act quickly for the most efficient resolution.

Don't let them get to you.
Collection agencies have a reputation for bullying and even using threatening tactics to try to intimidate people into repaying debts. This kind of abuse and harassment is illegal and should be reported to the FTC.

Do know where you stand.
Delinquent debts will show up first on your credit report (usually within 90 days of the missed payment), and bad debt reports will stay with you for up to seven years. Check your credit report periodically to ensure that no misinformation has been posted regarding your credit activity due to identity theft or a simple clerical error.

Do pay bills you owe - if you can.
If you're being contacted about a debt you owe and can afford to pay, do it. Saving the damage to your credit report will be worth it when you need strong credit in the future. We'll explain what to do if you can't afford to pay later in this article.

Don't give collection agencies your bank account information.
When paying on a debt, always pay with a paper check. This will provide you with proof that a payment was made. Never give them access to your bank account. An unscrupulous agent could attempt to overcharge you.

Do use your negotiation skills.
Collection agencies are authorized to negotiate repayment terms below the total amount of the debt - as low as 50 percent of the original amount. If you can't pay the full amount, but are willing to pay a percentage, tell them so. In many cases, they will prefer to get something from you than nothing at all; especially on older debts - the likelihood of recouping a debt decreases significantly the longer it goes unpaid.

Do be courteous.
There's no need to be rude or difficult - even if the collection agency is. You have a better chance of resolving the issues (especially if you're being contacted in error about a debt you do not in fact owe) if you're polite and helpful.

Do get everything in writing.
That means everything. If you come to a settlement agreement with the collection agency, get it in writing, as well as the original lender's approval of the settlement in writing to avoid them coming after you later trying to reclaim the balance.

Negotiate with creditors

When Collection Agents Cross the Line: The Debtors' Bill of Rights

Because the collections industry has developed a reputation for using aggressive and intimidating tactics, the FTC continues to strengthen the laws governing the manner and method by which collection agencies pursue repayment.

Here's an excerpt from the FTC Facts For Consumers pamphlet addressing commonly asked questions about the Fair Debt Collection Practices Act(View in it's entirety here):

What debts are covered?
Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, or for charge accounts.

Who is a debt collector?
A debt collector is any person who regularly collects debts owed to others. This includes attorneys who collect debts on a regular basis.

How may a debt collector contact you?
A collector may contact you in person, by mail, telephone, telegram, or fax. However, a debt collector may not contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves of such contacts.

Can you stop a debt collector from contacting you?
You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note, however, that sending such a letter to a collector does not make the debt go away if you actually owe it. You could stillbe sued by the debt collector or your original creditor.

May a debt collector contact anyone else about your debt?
If you have an attorney, the debt collector must contact the attorney, rather than you. If you do not have an attorney, a collector may contact other people, but only to find out where you live, what your phone number is, and where you work. Collectors usually are prohibited from contacting such third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money.

What must the debt collector tell you about the debt?
Within five days after you are first contacted, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money.

May a debt collector continue to contact you if you believe you do not owe money?
A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed.

What types of debt collection practices are prohibited?

Creditor Harassment


Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not:

  • use threats of violence or harm;
  • publish a list of consumers who refuse to pay their debts (except to a credit bureau);
  • use obscene or profane language; or
  • repeatedly use the telephone to annoy someone.

False statements.

Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:

  • falsely imply that they are attorneys or government representatives;
  • falsely imply that you have committed a crime;
  • falsely represent that they operate or work for a credit bureau;
  • misrepresent the amount of your debt;
  • indicate that papers being sent to you are legal forms when they are not; or
  • indicate that papers being sent to you are not legal forms when they are.

Debt collectors also may not state that:

  • you will be arrested if you do not pay your debt;
  • they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so; or
  • actions, such as a lawsuit, will be taken against you, when such action legally may not be taken, or when they do not intend to take such action.

Debt collectors may not:

  • give false credit information about you to anyone, including a credit bureau;
  • send you anything that looks like an official document from a court or government agency when it is not; or
  • use a false name.

Unfair practices.

Debt collectors may not engage in unfair practices when they try to collect a debt. For example, collectors may not:

  • collect any amount greater than your debt, unless your state law permits such a charge;
  • deposit a post-dated check prematurely;
  • use deception to make you accept collect calls or pay for telegrams;
  • take or threaten to take your property unless this can be done legally; or
  • contact you by postcard.

What control do you have over payment of debts?
If you owe more than one debt, any payment you make must be applied to the debt you indicate. A debt collector may not apply a payment to any debt you believe you do not owe.

What can you do if you believe a debt collector violated the law?
You have the right to sue a collector in a state or federal court within one year from the date the law was violated. If you win, you may recover money for the damages you suffered plus an additional amount up to $1,000. Court costs and attorney's fees also can be recovered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector's net worth, whichever is less.

Where can you report a debt collector for an alleged violation?
Report any problems you have with a debt collector to your state Attorney General's office and the Federal Trade Commission. Many states have their own debt collection laws, and your Attorney General's office can help you determine your rights.

End of excerpt from FTC Pamphlet(View full document here)

What Happens if You Can't Pay

There are two types of debts: secured and unsecured, and each poses a unique set of possible consequences if left unpaid.

Credit Card Agreement

Secured debts are those debts that are backed by collateral: a secured credit card, which is backed by a savings account; a home mortgage, which is backed by the house; and a car loan, for which the collateral is the car. By defaulting on a secured debt, you run the risk of losing your collateral.

Unsecured debts are debts that have no collateral backing them up, and therefore carry somewhat less severe penalties upon default: unsecured credit cards or department store credit cards are good examples. If you default on these types of debts, the consequences will not be as physically apparent as those incurred by defaulting on a secured debt (like, say, losing your house), but they can be extremely damaging. Typically, consequences for defaulting on an unsecured debt will include damage to your credit score - and possibly the complete revocation of your credit privileges - and you may face legal action (that is, get sued by the lender).

Bankruptcy should not be seen as a quick fix - avoid it unless absolutely necessary. The long term consequences of bankruptcy will be far more troublesome than dealing with the debt itself and the government continues to make bankruptcy law more stringent to keep consumers from using it as an "easy out." If you really don't feel you can handle your debt on your own, consult a credit counseling firm. They can typically negotiate for you and help you create a manageable budget to both meet your immediate needs and help pay off your debt.

The best thing you can do when dealing with a collection agency is to be informed. Know your rights, your credit history, your budget and your needs. Don't let collection agents use shame, intimidation or other illegal tactics to coerce payment from you - and if they do, report them to the FTC.

Debt is a part of our American reality. If you deal with it correctly, there's no reason you cannot come out debt free on the other side.


Important disclaimer: The information provided in this document is not legal advice. Transmission of this information is not intended to create, and receipt by you does not constitute, an attorney-client relationship. Always seek the advice of a qualified attorney licensed in the appropriate jurisdiction before taking any course of action that may affect your legal rights.


Additional Resources:

The Fair Debt Collections Practices Act - http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm

FTC Facts For Consumers -

The Federal Trade Commission Web site -

Credit.com: Collections Crash Course -

MSN Money: Sleazy New Debt Collector Tactics -

NY Daily News: Credit Report Disputes: You Can't Fight What Isn't There -

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