They go by many different names: debt settlement companies, credit counseling agencies, debt negotiators, etc. Many consumers turn to them when their bills started piling up. They pay the company several thousand dollars as an up-front fee. The company promises to get them out of debt through a “secret program” that the credit card company doesn’t want them to know about.
But what the debt settlement companies don’t tell consumers is that there really are no secret programs to get out of debt. I know this because I used to collect debts for some of the largest credit card companies in the world. And even though the credit counseling agency promises to settle your debt for pennies on the dollar, remember that it takes two parties to settle a debt, the consumer and the creditor. And creditors rarely settle debts for pennies on the dollar. So now the consumer is in the same position as they were before hiring the debt settlement company, only their wallet is noticeably lighter.
Consumers would be wise to avoid for-profit debt settlement companies. Many are outright scams that will pocket your money and then disappear. And even the legitimate ones can’t do anything that you can’t do yourself for free. But if the thought of negotiating with your creditors makes you nervous, there are many non-profit programs that do fabulous work for no fee.
Don’t tell a debt collector where you bank or work.
This information is very valuable to a debt collector because bank and wage garnishments are easy and cheap ways to collect debts. Never voluntarily give this information to a debt collector. A favorite trick debt collectors will use to get you to tell them this information is to say “I already know you bank at ABC Bank.” Surprisingly, many people will reply “No I don’t. I bank at XYZ Bank.” Don’t fall for this trick.
Keep accurate records of all communications with debt collectors.
If you talk to a debt collector on the phone, immediately after hanging up, write down everything that was said during the conversation in as much detail as possible. Sign and date these notes. If a debt collector violates the FDCPA, your notes can be used as evidence of the violation. Similarly, be sure to keep every letter sent to you by a debt collector, including its envelope.
Demand that the debt collector confirm any agreement in writing.
If you agree to a payment plan or settlement with a debt collector, before sending any money, demand that the debt collector confirm your agreement in writing. It’s not unheard of for debt collectors to try to back out of payment agreements. Also, if a debt collector gives you an extension of time to make a payment or to respond to something, make sure they confirm that agreement in writing.
Avoid long, open-ended payment plans.
Debt collectors will usually agree to monthly payment arrangements on the full balance, plus accrued interest. If possible, avoid this type of payment plan. With the high interest charged by most credit card companies, you will be paying the debt back forever. If possible, negotiate a fixed amount and term. This way you know exactly how much you’ll be paying and for how long.
If you are sued, talk to a consumer lawyer immediately.
A debt collection lawsuit is serious business. Unless you are well-versed in the rules of civil procedure and have a good understanding of the deadlines involved in litigation, you should strongly consider getting advice from a consumer lawyer. I’ve seen many cases where consumers chose to represent themselves, had strong defenses, but ultimately lost because they failed to follow a court rule or meet a deadline.
The Fair Debt Collection Practices Act (FDCPA) is a federal law that prohibits certain conduct by debt collectors. Its important to understand that the FDCPA only applies to communications with “debt collectors” (ie. not the original creditor collecting its own debt) and to “consumer debts” (ie. not business debts). Under the FDCPA, a debt collector is forbidden from doing any of the following:
- Communicate with you at inconvenient times or places. Inconvenient times are generally considered to before 8:00 a.m. and after 9:00 p.m., local time where the consumer is located
- Contact you directly if the debt collector knows you are represented by an attorney
- Communicate with you at work if you tell the debt collector not to call you there, or if the debt collector knows that you cannot receive calls at work
- Contact third parties and inform them you owe a debt
- Communicate with you after you’ve requested that the debt collector stop calling you
- Engage in conduct that is harassing, oppressive, or abusive to you
- Threaten you with violence or other criminal behavior
- Use obscene, profane, or abusive language
- Use false, deceptive, or misleading representations or collection methods
- Threaten to take legal action if there is no intention or authority to do so
- Falsely imply an affiliation with a government
- Falsely represent the amount, character, or legal status of a debt
- Falsely imply that the debt collector is an attorney
- Imply that non-payment will result in arrest or imprisonment
- Collect any amount that is not legally owing
This is not an exhaustive list, and there may be exceptions to some of the general prohibitions.