Let’s assume for one second that you failed to stay informed about your credit by obtaining your free credit report. Out of nowhere, you get hit with a bunch of the repercussions that come with having bad credit. One thing that could make it worse is a lawsuit, but more on that later.

The funny thing is, you aren’t exactly sure when and where this bad credit came from. You are usually very good about paying your bills on time and in full. However, you let one slide by accident.

For whatever reason, you weren’t alerted in regards to your past due account and it instead went to a collection agency. And they are awful companies (#1, #2, #3, #4).

Who is the Creditor?

The “creditor” that you see mentioned all the time refers to the organization or company that has a claim to money that you owe them. They have either provided you a good or a service under the assumption that you will return to them something of equal value, usually monies. In this case, you are the debtor.

Going forward, when you see “creditor” you can think of the people who own your mortgage, your cell phone company, a doctors office, etc.

Who is the Collection Agency?

Hopefully it doesn’t get this far, but a debt can make its way from a creditor to a collection agency.

A collection agency is positioned as a business that either collects debt for creditors or buys the debt from creditors. If they are collecting debt for the creditors, they are acting as agents for a fee or a percentage of the debt owed. If they are buying the debt, they can often acquire it for as little as pennies on the dollar. And then what do they do? Turn around and attempt to collect the full amount. Of course there is a risk involved, but they are pretty relentless in their tactics.

Transfer From Creditor to Collection Agency

What is the process involved in having a bill go from your original creditor to the collection agency?

Typically the collection agencies that act as agents for creditors are departments or subsidiaries of the original creditor. They are called first party agencies. Because of this, no transfer of the debt is needed and they are not governed by the Fair Debt Collection Practices Act. A creditor will keep the account open for 6 months, on average, before writing it off as a loss and selling it to a third party agency.

Now, when you think collection agency, you don’t think about what I was talking about above. Even though they can be technically called a collection agency, that isn’t what you think of. You usually think of a third party agency. They are called third party agencies because they weren’t part of the original creditor-debtor relationship.

How do they work? As mentioned above, they usually either collect the debts and get an agreed upon percentage or buy the right to collect on the debt for cents on the dollar. It depends on the agreement between the creditor and collection agency. These agencies ARE governed by the FDCPA.

Hopefully that brief description gives you a better idea how they work, but what about the main question?

Can a Collection Agency Sue to Collect on the Debt?

Short answer: Most definitely.

The collection agencies are not new at this. They hire trained professionals (collection lawyers) to try and collect on your debt. These are lawyers who specifically specialize in debt collection, so this won’t be a fun experience.

The normal procedures of a lawsuit are abided by, with some other quirks:

1. The collection lawyer files the lawsuit with the court;
2. The court documents are served upon the debtor by an outside company or Sheriff’s deputy to avoid allegations of wrong doing;
3. The debtor, after being served, needs to respond to the lawsuit in some manner (depending on state law). If no response is given, the collection lawyer will ask for a default judgment which pretty much guarantees the case will be ruled in favor of the collection agency;
4. If judgment is granted in favor of the collection agency they are then empowered to take action to get their money back.

Getting their money back after a judgement is made is usually done by garnishing wages. Employers are issued an order of garnishment which, under Federal law, can’t exceed 25% of disposable earnings or 30 times the minimum wage. Different states have more laws which will take effect. Some states only allow less than 25%, some don’t allow garnishment for people earning less than $20,000/year, some don’t allow garnishment if a persons wages are already being garnished, and four states (NC, PA, SC, TX) don’t allow garnishment for collections on personal debt.

However, garnishment isn’t the only recourse. The collection agency can execute against the debtor’s assets (real estate, automobiles, bank accounts, etc). State laws go into restrictions, so make sure to check them. When an asset is executed against, it is sold and the proceeds sans fees are given to the collection agency. Anything in excess is given back to the debtor. If you read link #3 in the intro, you will see how a woman had a $68 bill lead to her house being executed on. She lost her house over what was originally a $68 bill.

Lastly, the collection agency can place a lien on certain bonds the debtor has with the government or other non-exempt property.

Protect Yourself

If you clicked on the four number links in the intro, you will have read four cases that were not particularly the debtors fault. Whereas it was their responsibility, they didn’t act in bad faith. When they went to correct their problems, the way the industry is setup made it very difficult for them.

So this isn’t just a problem for deadbeats. How can you protect yourself?

• Deny you owe the debt, even if you know you do. This is not to be immoral, but to protect you from an unethical collection agency that doesn’t stick to its word.
• Each state varies on its statute of limitations that limit the length of time between when your debt went delinquent and when they can file suit. Check your state laws.
• Make all correspondence in writing. Preferably certified mail.
• Document any occurrences where the collection agency breaks the FDCPA. This means: calling before 8am or after 9pm, continuing to communicate after you have given written notice that you do not intend to pay them or talk to them (other than to let you know they are starting court proceedings), harassment (excessive calling, calling at place of employment after being told to cease), contacting you after being informed you are being represented by an attorney, continuing communication after receiving a written request for validation of the debt, misrepresentation, threatening arrest or legal action when it is not currently being contemplated or even permitted, abusive language, communicating with third parties (other than spouse and attorney), reporting false information on a credit report, etc… Yeah, there’s more, but you get the idea!
• To do the above, document by writing everything down (day, time, person talked to), saving all mailings, and even recording calls if you have the ability.

Privacy Rights Clearinghouse goes over ways to protect yourself from debt collection practices pretty thoroughly. Check it out if you want something more in-depth than my overview.

Good luck! :) Have any of you had a POSITIVE experience with a collection agency? Doubtful, but thought I would ask! Feel free to share negative experiences, too.