Consumer Debt Collection and Garnishment
Consumer Debt Collection and Garnishment
Sections within this essay:Background
General and Secured Creditors
Sequence of Events
Internal Efforts by Original Creditor
Offers of Settlement
Attorneys for the Creditor
Satisfaction of Judgment
Property Seizure and Garnishment
Fair Debt Collection Practices Act
Federal Trade Commission (FTC) Consumer Response Center
National Association of Consumer Advocates (NACA) USA
National Consumer Law Center (NCLC) USA
National Foundation for Consumer Credit USA
In a robust economy (such as that of the economic boom during the 1990s and early 2000s), credit comes easy and consumers often respond by over-indulging in purchases and loans. Many consumers ultimately find themselves overextended in both available credit and outstanding debt. However, when credit tightens, or personal circumstances in the life of a consumer-debtor change, there can be a domino effect spreading from individual debtors all the way to the national economy.
During rough financial times, there is often nothing as difficult as picking up the telephone and informing a creditor that a payment will be late or not coming at all. However, this is precisely what needs to be done. Creditors often have as much at stake in a defaulting account as the debtor. Therefore, it is to the benefit of both parties to attempt a solution short of formal proceedings.
In order to fairly accomplish this, debtors should be acquainted with their rights and the various laws, remedies, and procedures available to both them and their creditors.
At the outset, it is important to distinguish between two main classes of creditors, to whom debts may be in default. The distinction directly affects the outcome of a debt collection matter.
A secured loan is one that requires the debtor to pledge something of value as collateral for the loan. Home mortgages and auto loans are common examples affecting most consumers. In each of these two examples, the purchased house or the purchased automobile becomes the collateral for the loan, and the lender has a "security interest" in the collateral/property that secures the debt. When a debtor defaults in payments, the "secured creditor" can simply repossess the car or house. (A foreclosure on a house is a form of repossession by the lender, but federal and state laws impose additional notice requirements upon defaulting debtors. However, in the classic "land contract" sale of property at common law, debtors who defaulted in payments generally lost the property and all equity therein.)
On the other hand, most credit card debts, revolving credit at retail stores, student loans, etc., are unsecured debts. The "general" (unsecured) creditors must file suit and win a judgment against the debtor before they can seize or sell any assets or belongings of a debtor to satisfy the debt. Once the general creditor has obtained a judgment against a defaulting debtor, the general creditor stands as a secured creditor who may then move on to levy liens or writs of execution against a debtor's assets and personal property. (See "Formal Proceedings" below.)
Once a debtor has defaulted on making a payment as originally agreed to between the debtor and creditor, the creditor has several choices. It may contact the debtor directly, turn the matter over to an internal collections department, or turn the matter over to external collection agencies.
It is clearly within the best interests of both creditor and debtor to resolve the matter "internally." Depending on whether the creditor is a general or secured one, the options available are broad. Generally, however, most consumer debt (other than for houses and automobiles) is unsecured, and creditors are general creditors whose collection activities are more limited prior to obtaining an actual judgment against a debtor.
Depending upon the debtor's prior payment history with a particular creditor, no action may be taken at all, other than a friendly "reminder" letter, if a monthly payment is missed on an installment agreement, revolving credit account, or credit card account. Creditors are happy to charge late fees, add accrued interest to the new balance, and double the amount owed for the following month. However, after a certain number of days without payment (again, depending on the debtor's prior history), creditors will contact the debtor, usually by correspondence and telephone. If there is no satisfactory payment or arrangement made, most major creditors will turn the account over to an internal collections department.
Typically, letters from the internal collections department of a creditor will ask the debtor to send payment or contact the creditor immediately. The creditor will attempt to collect at least the past due payment prior to the end of the month (irrespective of the original payment due date) in order to avoid reporting the late payment to a credit reporting bureau or agency. The creditor will also attempt to secure a payment over the telephone, and preferable secure staggered payments, using postdated checks, for the next three payments. At this point, it behooves the creditor to work with a debtor, because if it must turn the account over to a collection agency, it will only be paid a percentage of the amount collected from the debtor after the collection agency has been paid its share.
If a creditor is unsuccessful in collecting a debt payment, it may retain an outside service, or collection agency, to continue efforts to collect on the debt. A collection agency receives a percentage of the amount recovered, usually between 10 and 50 percent, in return for its efforts. Because its chief concern is to maximize its own potential earnings on the account, a collection agency's tactics are regulated by both federal and state law (see below).
Within five days of its first telephone call to a debtor, a collection agency must send a notice in writing that states the total amount owed, and the name of the original creditor for whom the agency is attempting to collect. The written notice must also inform the debtor that he or she has 30 days from receipt of notice to dispute the debt in writing, and/or request a written verification of it.
Debtors are usually authorized at this point to make payments directly to the collections agency, which will forward the net balance (after deducting its percentage of the recovered amount) to the original creditor. It is imperative, prior to making any payment, that the debtor verify that the collection agency indeed represents, and is the agent for, the principal creditor. A debtor may reasonably rely on correspondence from the collection agency, stating the name of its creditor client, as evidence of this.
At all stages up to this point, creditors may be open to negotiating a settlement in lieu of the entire amount owed. The more it will cost a creditor to pursue collection activity against a debtor, the more it may be interested in a lump sum settlement offer. However, because the creditor has incurred additional costs and expenses in pursuing collection, a proffered settlement amount may not be palpably less than the amount of the original debt. For example, a defaulted debt of $10,000 may result in the addition of late fees, accrued interest, and attorney or collection fees, such that the debtor now owes $14,000. If the creditor agrees to accept $10,000 in full settlement of the outstanding debt, the debtor is no further along than he was before he defaulted in the first place.
If a collection agency is unable to secure payment or contact with a debtor, the next step in usually litigation. Once the debtor's account file has been turned over to an attorney for litigation, the debtor's chances of negotiating payment or settlement with the creditor are slim to none. Moreover, once the matter has gone this far, the debtor will most likely be responsible for the payment of all attorney fees and costs associated with collection efforts, in addition to the original debt owed. Importantly, attorneys or law firms that regularly engage in the collection of debts are subject to the provisions of the Fair Debt Collection Practices Act (FDCPA) as are collection agencies.
At this stage (even though it can legally be done at an earlier stage), the creditor, or attorney acting on its behalf, will invoke any "acceleration clause" that may be in the original loan or credit agreement. These clauses are common, but usually not acted upon until a debtor fails to pay the delinquent amounts or falls seriously behind in payments. If a debtor defaults on payments, an acceleration clause, to which the debtor has agreed in the original paper-work for the credit or loan, "accelerates" all future payments so that the entire loan balance (not just the payments in arrears) is immediately due and payable in full. If a debtor has not already received notice that the creditor is demanding the entire loan balance, an attorney will be certain to do this prior to filing suit against the debtor.
Of course, if the debtor was able to pay off the entire loan in question, he or she would not be in default in the first place. Even if the attorney makes one last settlement offer of a percentage of the entire balance, the likelihood of the debtor being able to pay is nil. This, then, is a very serious stage of default that will most likely result in a lawsuit being filed against the debtor.
If the above measures have all failed to resolve a debtor's default, creditors may file suit in local state or federal court. This makes the debt collection a matter of public record. There are very few available defenses, except those permitted by the Uniform Commercial Code (UCC) for defective products
Creditors' lawsuits are generally grounded in contract. Damages are limited to the face amount of the loan balance, accrued interest, (sometimes) attorney fees, and court costs. Creditors will sue for the entire balance owed on the account, not just the payments in arrears. They seldom ask other creditors to join them in a suit, even if those other creditors also have defaulted loans. This is because there seldom is sufficient assets to cover the entire judgment immediately, and the creditor that filed suit wants to be first in line. If a defendant-debtor fails to appear in response to the lawsuit, a default judgment will likely be entered against him or her.
After a judgment is entered against a debtor, the prevailing creditor (now a "judgment creditor") will employ various tactics to collect on the judgment. State laws dictate the number of years a creditor may pursue collection on an outstanding judgment; typically, they are 10 to 20 years. Debtors whose attitude had been, "Go ahead and sue me, I don't have any money" are surprised to learn that any assets they acquire for the next several years can be seized or forfeited in satisfaction of an outstanding judgment.
Following successful judgment against a defaulting debtor, creditors will usually ask a court for a creditor's hearing, in which the debtor must make a sworn declaration of all assets and property. This may be done in writing or by oral deposition. Exempted property (that which cannot be seized in satisfaction of a judgment) includes a primary residence up to a certain value, vehicles not used for employment, tools used for employment, some personal effects and household goods, and life insurance/retirement proceeds. However, funds in bank accounts, extra vehicles, boats, campers, and other items of value (musical instruments, stocks and bonds) are subject.
Judgment creditors generally do not come upon a debtor's property and seize items. Instead, they present a copy of their court judgment, along with a "writ of execution" form, to local law enforcement officials (sheriff, marshal, constable) who will "execute" the writ and seize property.
A judgment creditors may also request that the court issue of writ for garnishment of the debtor's wages. If granted, the court order for garnishment is served directly upon the debtor's employer, who must comply with its terms. Generally, up to 25 percent of wages can be garnished from a judgment debtor's wages. The garnished amount is paid directly to the judgment creditor by the debtor's employer.
Seized property may be sold at public auction, with proceeds returned to the judgment creditor. Most states permit "redemption" (repurchase by the debtor) of real property (real estate) sold at auction, within a specified time, e.g., one year. Money received at auction which is in excess of the debt owed is returned to the debtor.
The Fair Debt Collection Practices Act of 1977 (FDCPA) (15 USC 1601) protects consumers from illegal or improper practices in debt collecting. Its mandates apply only to consumer debts and not to business debts. Further, they do not apply to collection efforts made directly by the creditor to whom the debt is owed. The law is enforced by the Federal Trade Commission (FTC).
What may be perceived as improper conduct or harassment by a stressed debtor may not in fact be illegal or improper at all under the Act. What is pro-hibited of a collection agency includes the following:
- Communicating with the debtor's employer, neighbors, or anyone else for any reason except to ask where the debtor lives
- Informing any person that an attempt is being made to collect a debt from the debtor
- Sending postcards or mail that reveal the sender as a collection agency
- Contacting a debtor at a place of employment, if the debtor or the employer objects
- Telephoning a debtor before 8:00 a.m. or after 9:00 p.m.
- Using obscene, profane, or threatening language
- Make the debtor's name public as a person who fails to pay debts
- Failing to identify himself/herself as a collector; pretending to be a lawyer, law enforcement officer, or other government official
- Obtaining information from the debtor under false pretenses, e.g., taking a survey or suggesting that the debtor has committed a crime
- Contacting a debtor who has informed the collector that he or she is represented by an attorney
- Communicate in any way with a debtor who has informed the collector in writing that no more contact with the debtor is to be made
Creditors that violate the rights of debtors should be reported to the Federal Trade Commission (see below) or the National Consumer Law Center (see below), which will refer the debtor to a consumer law attorney practicing in the area. The following states permit debtors to secretly tape telephone calls from collection agencies:
- District of Columbia
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- West Virginia
In the remaining 15 states, a debtor must secure permission from the collector. While failure to secure permission may prevent the recording of illegal or improper collection agency tactics, it does have a chilling effect on a collector who has been asked if the conversation can be recorded. He or she will most likely not engage in improper tactics, for fear that the debtor is recording the communication, even without permission.
Baird, Douglas G., et al.(compilers). Commercial and Debtor-Creditor Law: Selected Statutes. Foundation Press, 2005.
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