In Over Your Head—Life-Saving Strategies for Financial Crisis

Bulletin 891

Section 2: When collectors start calling

Unemployment, illness, family problems, careless spending and many other problems can lead to a situation where you can't pay your bills. If bill collectors are calling, what do you do?

What you can do!

• When you must delay paying a bill, contact the creditor and explain the situation. Don't wait until you get your creditor's attention by missing a payment. Explain the facts of your situation and that you must pay your mortgage, utilities and certain other expenses before paying this particular bill. Let the creditor know that you have not forgotten this debt and you will pay when you can. Be honest about your expectations for future income. Make sure that the creditor knows you will not be able to pay a collection agency any sooner than you can him. Since a creditor must pay the collection agency either a fee per debtor or a percentage of the amount recovered, it is to his advantage not to send a bill to a collector. Try to convince your creditor to wait until your situation gets better.
• Examine all credit contracts. Pay on high-interest rate debt before lower-rate loans. Will you be charged late fees? Will these put you over your credit limit and cause you to be charged additional fees plus interest on these additional fees? Contact these creditors to try to make some adjustments. Don't wait until the original creditor sends a debt to a collector. Collectors don't negotiate readily.
• Determine which of your debts are secured and which are unsecured (see Know what you owe on pages 3–5). Don't convert low-interest, unsecured loans to secured loans by taking a line-of-credit mortgage or other consolidation loan using collateral. (Collateral is property that can be taken by a creditor if you don't pay a debt as you agreed. Secured loans are loans that have collateral. Unsecured loans don't have property which can be repossessed.) A secured creditor can repossess the property that secures the debt. A landlord can evict you, a mortgage holder can take the property that is mortgaged, and a utility company can cut off service. An unsecured creditor can do three things: stop doing business with you, report your default to a credit reporting agency, and bring a lawsuit to collect debt. Creditors can turn your account over to their own collection department or to an outside agency for collection.

What collectors can and can not do

• Whether your debt is collected by the original lender or is turned over to an outside collection agency, you can expect an aggressive campaign to get your attention. The collector's tools include letters and phone calls with suggestions on how you can pay the debt in full.

  Do not let the pressure of these contacts cause you to pay even a small amount on low-priority bills if it means you can't meet high-priority obligations such as mortgage, utility or food expenses.

  Debt collectors may suggest that you borrow from a loan company, other credit cards or relatives to pay your debt to them. Don't turn unsecured debt into secured debt by taking a mortgage on property. You run the risk of losing the property if you can't pay.

  Sometimes collectors will try to convince you to send them postdated checks to cover the full amount. Don't do this. You may not have money in your account to cover these checks. Then you are faced with writing checks with insufficient funds.

• A collector from a collection agency who makes veiled threats to do anything except stop doing business with you, report a default to a credit bureau, or sue for the unsecured debt is using deceptive practices and is in violation of federal law. You can obtain information on the Fair Debt Collection Practices Act (FDCPA) by writing to the Federal Trade Commission, Bureau of Consumer Protection, Washington, DC 20580.
• A collector may threaten to ruin your credit report. Your credit report will probably already show that you are 30, 60, 90, or more days behind in paying your bills.

  Most creditors who report to a credit bureau do so monthly by computer. Negative information the collector could place in your file is probably already there.

Stopping Harassment

• The simplest way to stop collectors from harassing you is to write a letter requesting that they stop collection contacts. (This is called a cease letter; see the example on page 11.) In this letter, outline the objectionable behavior of the collector's employees. Keep a copy of the letter for later reference.

  Be aware, however, that federal law does not apply to creditors who are collecting their own debts. Frequently when a creditor receives such a letter, they will honor the request. Keep in mind that under the FDCPA, a debt collector must stop all communications except to tell you collection efforts have stopped or that a specific remedy is being invoked against you, such as filing suit. However, this does not make your debt disappear. Collection efforts can continue using legal means. Only the harassment stops.

• Some consumers seek help from an attorney when they are being hounded by collectors. If your cease letter is not effective, then perhaps one from an attorney might be. As long as your attorney responds to a collection agency's inquiries, the agency must stop contacting you. Most of the time a simple cease letter will accomplish this without the added attorney's fees.
• Another way to stop harassment from a collector is to work out a payment plan. When the collector finally knows that he will not get the payment in full, he may be willing to work out a payment plan with you or with a credit-counseling agency. Be careful not to agree to a payment plan that will interfere with meeting your high-priority obligations. It is not in your best interest to make small payments on an unsecured debt if it means you can't make payment on a secured debt.
• Bankruptcy is another way to stop collection activity. Filing the initial papers triggers an automatic stay. This mean all collections, whether from a creditor or a collection agency, must stop unless permission is granted to a creditor from the bankruptcy court. The court will not give this permission for unsecured debt. Bankruptcy should be reserved for serious financial problems. (See section 6 of this booklet for more information.) If your only problem is harassment by collectors, the other remedies listed should be used first.

Sources:

Detweiler, Gerri. The Ultimate Credit Handbook, Plume Books, USA Inc. 1993.

Leonard, Robin. Quick & Legal Credit Repair, 3rd Edition, Nolo Press, Berkeley, CA, 1999.

Leonard, Robin. Money Troubles: Legal Strategies to Cope with Your Debts, 3rd Edition, Nolo Press, Berkeley, CA, 1995.

National Consumer Law Center. Surviving Debt, National Consumer Law Center, Inc., Boston, MA, 1996.

Richards, Chris J. Debt Control, Emerald Ink Publishing, Houston, TX, 1998.

Seiling, Sharon B., and McKinney, Carolyn, Know What Your Owe, Ohio State University Extension. Revised by Diane Johnson, July 2000.