Consumers should be wary when old debt resurfaces, whether a notice appears in your mailbox from a debt collector or one shows up on your doorstep. That''s because there's a good chance this accusation of some liability you owe could turn out to be a scam.
Debt collectors who appear at your home or your workplace are an extremely rare occurrence, and ensuring the person is not a fraudster should be a consumer’s first priority.
Old debt that was already settled with the creditor or another debt collector, discharged in a bankruptcy, debt that is past the statute of limitations, debt that does not appear on your credit report or ones that you never owed due to identity theft, can come back to haunt consumers, said Amy Hebert, a consumer education specialist for the Federal Trade Commission, the federal consumer fraud protection agency, in a blog post.
When a collector revives the debt, start by checking that the debt is real. If the debt does not sound familiar, it is likely a fake debt collector is calling. Beware of your rights and obtain a copy of your free credit report at www.annualcreditreport.com to check out if the debt is listed.
Consumers are federally protected by law when faced with debt collectors such as asking the collector to send a written validation notice with information including the amount owed and the creditor’s name, Hebert said. Scammers have posed as debt collectors in the past, so verify the debt by asking for written documentation.
“By law, the debt collector has to send you this notice within five days of contacting you,” she said.
Since there is a statute of limitations on debt, “bad” debt should fall off credit reports within seven years of the date of the original delinquency, said Jim Triggs, a senior vice president of counseling and support of Money Management International , a Sugar Land, Texas-based non-profit debt counseling organization.
While there is a federal statute of limitations on debt, it does not prevent debt collectors from trying to obtain money from a person, because "it's not illegal to attempt to collect on old debt, Triggs said.
Ignoring a lawsuit from a debt collector is never a good idea, said Hebert. Responding personally or through an attorney by the date listed in the court document is the only way for consumers to “preserve” their rights, she said.
“Although it is rare, one could even be sued over old debt,” Triggs said. “If that was to happen, the statute of limitations regarding the debt can be raised to attempt to avoid judgment against you.”
Resetting the Debt Clock
If it has been seven years since the unpaid debt occurred, do not make any promises or start making payments on the bill, Hebert said. The debt collector could opt to sue you for the entire amount of the bill, along with interest and fees.
“If a debt collector threatens, harasses or intimidates you into paying a zombie debt — that’s illegal,” she said. “Report it to the FTC and your state Attorney General’s office.”
Your old debt that you thought was dead can be sold to debt buyers or placed at different collection agencies, Triggs said.
While it is unusual for a debt collector to come to your house or office, you have the right to send the creditor a certified letter asking that the person or agency only communicate with you regarding the debt via mail.
“Most legitimate creditors or collection agencies will abide by this request,” Triggs said. “It will not cease collection activity or the possibility of a lawsuit, but it may keep them from making unplanned visits.”
Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization, said that he's even seen a local sheriff serve warrants for unpaid debt. The debtor was given a court date and the option to contact the collection agency before the hearing.
“If there was no resolution by the time of the court date, consumers were able to plead their case before the judge,” he said. “If the judge decided in favor of the plaintiff, a judgment was issued for the amount owed, plus court fees and a nominal interest charge. Never during my time handling these matters was a person arrested or detained for the debt they owed.”
One exception occurs when a company is attempting to repossess property such as your car, said Mark Parsells, CEO of Global Debt Registry, a Wilmington, Del.-based debt clearinghouse for consumers and collectors.
“As long as the repossession is consistent with federal and state law, these protections do not apply,” he said.
Federal Student Loans Take Priority
Student loan borrowers who are in a quandary because they can not make the minimum payments should ensure that paying their federal student loans is the first priority. The consequence of not paying your federal student loans after nine months is grim, because both your wages and taxes can be garnished and your credit score will drop several hundred points immediately. Both private and government-backed student loans are not included if consumers file for bankruptcy with few exceptions.
Knowing when you have to call the loan guarantor to discuss options is crucial because government-backed student loan guarantors won’t work with you after it’s been nine months. Last December, the government added a new income-based repayment option called REPAYE, which allows qualified borrowers to cap their student loan payments at 10% of their monthly discretionary income, a decline of the previous 15% threshold.
In addition to the monthly payment cap, this new plan will forgive remaining student loan debt after 20 years for undergraduate studies and 25 years for graduate study if borrowers are enrolled in the REPAYE program.
Once it has been nine months, consumers have defaulted. Even if you believe you have exhausted all of your options, work out a plan with your lender before the situation becomes this dire. Once you reach this level, you are not eligible for deferment, forbearance or repayment plans, said Triggs.
Even worse, the entire unpaid balance of your loan and any interest is immediately due and payable.
The consequences of a default can be severe because both your federal and state income taxes may be withheld, he said.
“This means that the IRS can take your federal and state tax refund to collect any of your defaulted student loan debt,” Triggs said.
Unlike private student loans, federal loan lenders can move through the process of garnishing your wages quickly. Since they do not have to go court and wait for a judge to approve garnishing your wages, once they sue you, these lenders can “go straight for your paycheck,” McClary said.