Understanding Debt Collection
Debt collection happens when a company tries to collect money it says you owe. The company contacting you may be the original creditor, a collection agency working for the creditor, or a debt buyer that purchased the debt. Understanding who is calling and what they claim is the first step to making an informed decision.
Original Creditor vs. Debt Collector vs. Debt Buyer
The original creditor is the company you first owed money to. A third-party collector is a separate company hired to collect. A debt buyer purchases debts, often old or charged-off debts, for less than the full balance and then tries to collect. Knowing which type of company is contacting you helps determine your next steps.
Validation Notices and Your Right to Dispute
Under the Fair Debt Collection Practices Act (FDCPA), collectors must provide certain information about the debt, including the amount owed, the creditor's name, and your right to dispute. If you do not recognize the debt or the amount is wrong, you can dispute it in writing and request verification before paying anything.
Collection Call Rules
The FDCPA prohibits collectors from using harassment, threats, abusive language, or false statements. Collectors generally cannot call your workplace if they know your employer prohibits it, and they cannot discuss your debt with friends or family. You can request in writing that a collector stop contacting you.
Old and Time-Barred Debt
Each state sets its own statute of limitations on debt, after which a collector's ability to successfully sue may be limited. However, the debt itself does not disappear. Be cautious with old debts because in some states, making a payment or acknowledging the debt can restart the statute of limitations clock.
Settlements and Getting Agreements in Writing
If you choose to settle a debt, get the agreement in writing before paying. Forgiven debt of $600 or more may be reported to the IRS as income on a 1099-C form. Understand the terms, including whether the settlement is for the full balance or a reduced amount, and how the account will be reported to credit bureaus.
Collection Scams
A real collector should be able to identify themselves and provide information about the debt. Be extremely cautious if someone threatens arrest, demands immediate payment through gift cards or cryptocurrency, refuses to send written information, or pressures you to pay before verifying the debt.