Got Debt?

[Desert Dweller]

I came across this story that will be interesting to anyone who has had financial issues in the past.  First off, you need to know how creditors and credit reporting agencies work.  Let's say you run up a bill of $5,000 on a credit card.  You lose your job and can't pay.  Of course, the creditor pursues you, dings your credit report every month you don't pay.  Because you don't have a job, they don't garnish your wages.  Or, the debt may be too small for them to pursue so they write it off and ding your credit report one last time.

Fast forward ten years.  The debt has fallen off your credit report, which is now somewhere in the low-to-mid 700s because you have a good job and have been paying your bills on time.  You have forgotten all about that credit card that you couldn't pay back then.  You haven't heard a word from anyone in years.  Then suddenly:

You get a letter in the mail from an agency representing Evil Lender Bank offering to settle your $5,000 credit card debt for only two thirds of what you owe, or

You get a phone call stating that if you don't pay up now they will garnish your wages, ding your credit report, poison your cat, and send a note to your mother.

What they are counting on you not to know is that old debt is largely uncollectable.  Each state has a statute of limitations.  In Arizona, that's three years for unsecured debt (credit cards), six years on a promissory note.  Now, that doesn't mean you don't still owe the money - morally you owe it.  Maybe some day you will chose to pay it keeping in mind that your creditor got a tax break on what you didn't pay.

The collector that's calling you isn't the original lender.  It's a predatory company that buys old, uncollectable debt for a small fraction of the original about.  Depending on how old, how much, and what the assumed likelihood of collecting it is, that $5,000 debt may have sold for fifty bucks.  The collector will try to get anything he can - even a hundred bucks is 100% gross profit.

Here's the scary part.  The clock that started when you stopped paying and ran out three years later, well, if you pay a dime, or even agree to pay a dime, then the clock starts all over again.  The collector can report to an credit bureau as a new debt.  They can go to court and get a writ of garnishment if you don't pay as agreed.

One of the leading agencies in collecting old debt is Portfolio Recovery Associates.  These guys are relentless and will keep it up until someone reminds them that the debt is old and you have no intention of paying them anything. 

Anyway, here's the article.  I found it interesting reading.

http://abcnews.go.com/Business/dangers-dealing-past-due-bills/story?id=15509638#.TzCkSNXOuSo

[mallardisme]

"Here's the scary part.  The clock that started when you stopped paying and ran out three years later, well, if you pay a dime, or even agree to pay a dime, then the clock starts all over again.  The collector can report to an credit bureau as a new debt.  They can go to court and get a writ of garnishment if you don't pay as agreed."

This is very true. By paying on that forgiven debt, the law shows that you have re-entered the contract, with a new debtor.

There are many reasons that folks are in similar postitions. Loss of job, Ex takes them to the cleaners, they invested in stocks and were a millionaire for 3 days, they bought a $500,000 house that is now worth $25,000... (Don't judge too harshly given the horrible recesion we are still seeing)

What happens with bad debts is that they are sold. Collection companies buy this debts for pennies on thousands of dollars and go fishing. When they find someone who is back on their feet, they get them to make a payment. Once that happens, they are able to own the full debt, with a renewed contract due to the payment. Most of the times it does not pay off. Sometimes it does.

[Desert Dweller]

It's not a forgiven debt - that would mean the creditor said you don't have to pay.  It's just not a collectible debt because the statute of limitations has expired.  The clock indeed starts anew when you make a payment or enter into an agreement.

Here is another trick they use:  You owe $1,000 so they give you a credit card with a $1,000 limit and charge the entire amount you owe to the credit card.  As you make payments, you get an available credit balance on your card.  You are jumping with joy because nobody else will give you a card because of your credit history.  Well, now your credit rating just got worse because you owe 100% of your available credit.  Plus, the card they give you is a high risk card at 29% so you are going to be paying a while before you have any credit available on the card.  And if you use what little available credit you have, your credit rating stays down.

[CopaDave]

This should be stickied at the top of the page.

Great information.

[Desert Dweller]

http://abcnews.go.com/Business/oregon-woman-debt-collector-called-911-phony-suicide/story?id=15539055#.TzPE79XOuSo

This story has some recordings of debt collectors plying their trade.   In one recording they threatened to shoot the family dog and eat him.  In another, they convinced an elderly woman that she would be arrested.  Then they called the police and told her the woman had threatened suicide several times during the call.  The police came out to the house and, against her will, took her to a hospital for evaluation.