If a collection account comes into your life, you’ve heard about it in one of 3 ways: a listing on your credit report, a telephone call from a collection agency or a letter in the mail.
You could try to use debt settlement methods to deal with a collection agency, but you might want to try debt validation first – best defense against these collections is often debt validation. Why? Because the collection agency may not even be legally entitled to collect the debt from you. What is debt validation?
A Tale of You, Joe, Bob and Money Borrowed
Let’s say you borrowed money from your friend Joe. Joe would be the creditor of this debt, the original creditor. Let’s say some time has gone by and you think you might still Joe money, though you’re not sure how much.
One day, a guy named Bob comes up to you and says he is collecting the money you owe Joe. Bob is acting just like a collection agency for a credit card company would. Think about it – having never met Bob before, would you just hand over the cash to him? No. Or at least I hope you wouldn’t. You should have these questions for Bob:
- How do you know that Bob is actually collecting for Joe? What legal documents does Bob have to prove that he is legally authorized to collect?
- How much is the actual debt? What payments have already been made on the account? Where is the accounting of the debt, including all interest and fees? Are these fees and interest amounts legit?
- Do you still really owe Joe the money? You remember borrowing money from someone else, your friend Sam, at the same time. You also remember paying one of them back the next day. Is this debt the one you borrowed from Sam or Joe? Where is the contract showing the terms of the loan with Joe and the one from Sam? At the very minimum you should call Joe or Sam on the phone to ask about the loan.
You should have the same thoughts about a collection agency who sends you a bill for a debt you may or may not owe.
Don’t Panic – Think of Our Example
If you receive a phone call or a letter from a collection agency, your first reaction may be to panic. Calm down and analyze the situation. Keep all the fancy language and legal terms out of the attempts by a collection agency to collect. Think of what you would ask Bob in our example. If you do, you’ll know exactly what to ask a collection agency (Bob in our example) to validate a debt.
(If you are wondering how a collection got on your credit report in the first place, read this).
The Fair Debt Collection Practices Act
Debt Validation is a legal procedure which is spelled out by the Fair Debt Collection Practices Act, or FDCPA.
It matters if the listing is from the original creditor or collection agency
The FDCPA does not cover collection tactics employed by original creditors (like credit card companies who issue credit cards). It only governs the actions of a debt collector (collection agency). Let’s look at the definition of these two groups as defined by the FDCPA.
TITLE VIII – DEBT COLLECTION PRACTICES [Fair Debt Collection Practices Act]
§ 803. Definitions [15 USC 1692a]
As used in this title –
(4) The term “creditor” means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another.
What does that mean? It means that, as far as the FDCPA is concerned, a creditor is the original entity which loaned money to a consumer. It is not a collection agency. The definition of a debt collector is as follows:
TITLE VIII – DEBT COLLECTION PRACTICES [Fair Debt Collection Practices Act]
§ 803. Definitions [15 USC 1692a]
As used in this title –
(6) The term “debt collector” means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.
So when a collection agency is assigned, or has purchased, your debt, they are NOT the creditor. They are the debt collector and the actions they take are all governed by the FDCPA.
What if the person asking you for the money, “Bob”, is a lawyer?
Under the FDCPA, even if Joe hires a lawyer or law firm to collect a debt from you, the lawyer or law firm is still considered a collector and must adhere to the FDCPA.
What does a debt collector need to provide as debt validation?
- Proof that the collection company owns the debt/or has been assigned the debt. (Bob is legally entitled to collect this particular debt from you.) This is basic contract law. It is very difficult to get a judgment without a direct contract between collection agency and the original creditor.
- At a minimum, some account statements from the original creditor. If you really want to get sticky, you can pin them down on the amount of the debt by requiring complete payment history, starting with the original creditor. (How the heck did Bob calculate this debt? What fees/interest Bob has tacked on to this debt and how he determined these fees?) This requirement was established by the case Fields v. Wilber Law Firm, Donald L. Wilber and Kenneth Wilber, USCA-02-C-0072, 7th Circuit Court, Sept 2004..
- Copy of the original signed loan agreement or credit card application. (Your contract with Joe establishing the debt between you.) However, account statements from the original can fulfill these requirements.
What Bob gets out of the deal
It use to be that in most cases, creditors assigned, not sold, its debts to a collection agency. But not any more.
Creditors hire collection companies (like Bob) to collect debts for them, because they simply don’t have the time or resources to chase down all of their severely overdue accounts. Collection agencies have cheap labor and a streamlined system to pursue such accounts. When a creditor hires a collection agency, the debt has been assigned to the collection agency. If a collection agency is successful at collecting the money on the account, they usually keep a percentage of what is collected as payment for services.
Original creditors sometimes sell debts in large portfolios to collection agencies. This is starting to be the norm, and several of these companies, called Junk Debt Buyers (JDBs), are now being traded on Wall Street. The companies do not spend much money at all for these debts, sometimes paying less than 1 cent on the dollar. Even if the debt is not a large debt, they often hire attorney to send out mass form-letters to debtors in the hopes of collecting. As you can see, even if they get a small percentage of the debtor to pay, profits are enormous. For more on JDBs, you can read our article here.
Assigned or purchased debt (How do you know Bob is the right guy to pay?)
Why should you care if a debt is purchased or assigned? In an assignment, the collection agency does not own the debt, and therefore you do not technically owe them any money. There is no way for a collection agency to prove that you owe them money because there is only an assignment of the debt and not a contract between you and the creditor.
One loophole: Some contracts have the wording “debtor agrees to be responsible for payment of this debt to creditor OR ITS ASSIGNS.” This IS a contract between you and the debt collector as well as the creditor and if they can provide you with a copy of a contract that states this (with your signature!), you are pretty much stuck and need to negotiate.
What if the collection agency (Bob) proves they purchased the debt? Is he now the original creditor and no longer subject to the FDCPA?
If they do purchase the debt, this does not make them the original creditor. They are still a debt collector and covered by the FDCPA.
Continue to treat any collection agency, junk debt buyer or law firm who says they own the debt as a collection agency subject to the FDCPA. You can still request validation and proof of the purchase, because if they can’t validate it, the collection agency can’t prove you owe the debt. Often a JDB will tell a consumer that since they purchased the debt, they are not subject the the FDCPA. It’s simply not true.
The Right to Validate Your Debt
Under the FDCPA, you are allowed to validate this debt, and the creditor (in this case, the collection agency) must show you proof that you owe the debt to the collection agency (not to the original creditor.)
The specific section of the FDCPA:
FDCPA Section 809. Validation of debts [15 USC 1692g]
(b) If the consumer notifies the debt collector in writing within the thirty-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.
Plus, they must show proof positive that you owe them this debt. It’s not enough to send you a computer-generated printout of the debt. There is an opinion letter from the FTC to back this up:
http://www.ftc.gov/os/statutes/fdcpa/letters/wollman.htm
Nor can they ask you to pay for digging up records of your debt:
http://www.ftc.gov/os/statutes/fdcpa/letters/krisor2.htm
So, if a creditor can’t validate a debt:
- They are not allowed to collect the debt,
- They are not allowed to contact you about the debt, and
- They are also not allowed to report it under the Fair Credit Reporting Act (FCRA). Doing so is a violation of the FCRA, and the FCRA states that you can sue for $1,000 in damages for any violation of the Act.
The opinion letter from the FTC which clearly spells out that a collection agency CANNOT report a debt to the credit bureaus which has not been validated:
http://www.ftc.gov/os/statutes/fdcpa/letters/cass.htm
It also states that you can sue in federal or state court. So if you have them on a violation, then you have damages of $1,000 for the incident plus damages. Small claims court, anyone?
When a collection agency responds to your request for validation with a summons to appear (meaning they are trying to get a judgment against you)
I’ve heard from my readers that some collection agencies are starting to respond to validation requests with summons to appear in court. There is precedent which says that a collection agency cannot even file suit against you if they haven’t validated the debt within the initial 30 day period. If this happens to you, you may cite the case:
Spears vs. Brennan
The appeals court determined:
“Brennan (plaintiff collection agency attorney) violated 15 U.S.C. § 1692g(b) when he obtained a default judgment against Spears (defendant) after Spears had notified Brennan in writing that the debt was being disputed and before Brennan had mailed verification of the debt to Spears.”
This means that you have an absolute defense in court to deny them judgment if they still have not validated the debt. Once you get your FDCPA dispute letter in, the collector cannot even get a judgment until they satisfy the FDCPA law. The appeals court overturned the default summary judgment in part because the collection agency lawyer did not meet the rules of the FDCPA.
This could be grounds for getting a default judgment vacated. It’s also another violation of the FDCPA and you can collect $1,000 from them.
The Debt Validation Strategy
It might be helpful to look at our illustration of the process before you get started. You might also want to read this, sort of our own “validation” of the process given here.
- Dispute the collection with the credit bureaus.
- Look up the Statute of Limitations (SOL) on the debt. If the debt is past the statute of limitations, send them a letter informing that they are trying to collect “zombie debt”. This is debt which is too old to have any legal liabilty for a consumer. Here is a sample letter for this.
- If the collection agency does not remove the listing after you point out the SOL, sometimes your only remedy is to sue them.
- If the debt is not past the statute of limitations, send a letter requesting validation to the collection agency (our buddy Bob in the preceding example). If you don’t know the address of the collection agency, here is a tip to help you find it.
- Wait 30 days to hear back from the collection agency. Most likely they will not respond or they will respond saying that they received your letter. Only a letter which includes one of the following:
- Proof that the collection company owns the debt/or has been assigned the debt,
- Copies of statements from the original creditor
- Copy of the original signed loan agreement or credit card application
is satisfactory.
- If they haven’t sent you satisfactory proof, and are still reporting this on your report, send a copy of your receipt for your registered mail, a copy of the first letter you sent and a statement that they have not complied with the FDCPA and are now in violation of the Act. Tell them they need to immediately remove the collection listing from your credit report or you are going to file a lawsuit because they are in violation of the FDCPA, section 809 (b).
- Wait 15-20 days to hear back after this second letter to the collection agency. They will either remove it or not respond.
- If they do provide a contract with a signature from the original creditor showing that you owe the debt, there is one more thing you can try: see if they are legally licensed to collect the debt in your state. Here is a good site to begin your search.Not all states require licensing, however. Here’s a little cheat sheet (Word Doc) to see what the collection licensing laws in your state are. It’s got other handy dandy state law information as well.If you believe that they are not licensed, and licensing is required in your state, write them another letter and tell them they are in violation of your state’s collection laws and are subject to prosecution and fines. Cite your state’s fines and procedures in the letter. This is a last ditch effort, but has worked in some cases.
- Typically, your work will stop here, as most collection agencies will bow down to your demands and send you a letter agreeing to remove the listing. Now all you have to do is send a copy of the letter to the CRAs.If the collection agency did not agree to remove the listing, then you need to continue to the next steps.
- File a lawsuit in small claims court against the collection agency on the basis of violating the FDCPA.
- Have the papers served to the collection agency. (You can find a paper server on the internet for about $25). Here is a good link: http://www.1-800-serve-em.com/servicemap.html
- In the meantime, in a parallel effort with your lawsuit against the collection agency:
- If the collection comes back as “verified” from the credit bureaus, you now have proof of further collection activity from the collection agency. (The assumption is that the credit bureau contacted the collection agency to verify the debt.) Since the collection agency did not validate the debt, further collection activity is a violation of the FDCPA.
- Contact the credit bureaus, and tell them that the creditors did not verify the debts under the FDCPA, and send copies of your proof. Request the method of verification, which is your right under the FCRA. It is crucial to contact the credit bureaus before filing a lawsuit. Make sure you state that the collection agency did not respond to your request for debt validation.
- You can try sending them this letter to see if they will budge. They may tell you that the request needs to come from the creditor. This is baloney. If they can’t give you reasonable information on how they verified the information and the collection agency has provided you none, you can conclude there was no reasonable investigation performed. Theyare teetering on the edge of ”willful non-compliance”under the FCRA. Tell them so.
- File a suit in either small claims, state or federal court. The basis of the lawsuit should be that the credit bureaus could not provide a satisfactory method of verification, or did not conduct a reasonable investigation.
- Have the papers served. (You can find a paper server on the internet for about $25). Here is a great link where you can search for the local office of the credit bureau near you.http://www.llrx.com/columns/roundup14.htm
- Notify the bureaus that you are suing them. You can use this letter. The credit bureaus will call the creditors and find out that there is a question about whether the debt is legitimate. They should delete it immediately. If you want more legal ammo, you might also try looking up similar cases to cite. We have a list of online resources here.
