Is It Illegal for a Collection Agency to Buy Your Debt?

Additionally, most states have their own debt collection laws that may provide even stronger consumer protections than federal law. These state laws can vary significantly, so it’s important to understand the specific regulations in your jurisdiction.

What debt collectors are legally allowed to do

When a collection agency legally owns your debt, they have certain rights to pursue collection. Understanding what they’re allowed to do can help you distinguish between legitimate collection activities and illegal harassment.

• Contact you about the debt: Collection agencies can call you, send letters, emails, and text messages about the debt. However, they must follow specific rules about timing and frequency. They cannot call before 8 a.m. or after 9 p.m. in your time zone, and they must stop calling if you request in writing that they cease contact.

• Report to credit bureaus: Debt collectors can report your unpaid debt to the three major credit bureaus (Equifax, Experian, and TransUnion), which can significantly damage your credit score. This negative information can remain on your credit report for up to seven years from the date the original account became delinquent.

• Sue you in court: If you don’t pay, collection agencies can file a lawsuit against you. If they win a judgment, they may be able to garnish your wages, freeze your bank accounts, or place liens on your property, depending on state law. However, there are important time limits called statutes of limitations that restrict when they can sue.

• Negotiate payment arrangements: Collectors can offer payment plans, settlements for less than the full amount, or other arrangements to resolve the debt. You’re not obligated to accept their first offer and can negotiate terms that work better for your financial situation.

• Verify and validate the debt: Collection agencies must provide you with information about the debt, including the amount owed, the name of the original creditor, and your right to dispute the debt. This is called debt validation.

What debt collectors cannot legally do

While debt collection is legal, the methods collectors use are strictly limited by law. The FDCPA and other regulations prohibit numerous abusive and deceptive practices.

• Harassment and abuse: Collectors cannot threaten violence, use obscene language, repeatedly call to annoy you, or publish your name on a “bad debt” list. They cannot call you at work if you tell them your employer prohibits such calls.

• False or misleading statements: Collection agencies cannot lie about how much you owe, falsely claim to be attorneys or government representatives, or threaten actions they cannot legally take or don’t intend to take. They cannot falsely imply that you’ve committed a crime or will be arrested for non-payment of a civil debt.

• Unfair practices: Collectors cannot deposit post-dated checks early, take or threaten to take your property unless it’s done legally, or contact you by postcard (which lacks privacy). They cannot add unauthorized charges beyond what’s permitted by the original contract or state law.

• Ignoring your rights: If you send a written request asking them to stop contacting you, they must comply, with limited exceptions. If you dispute the debt in writing within 30 days of their initial contact, they must stop collection efforts until they provide verification of the debt.

• Discussing your debt with others: With few exceptions, collectors cannot discuss your debt with anyone other than you, your spouse, or your attorney. They cannot tell your family members, friends, neighbors, or employers about your debt, though they may contact these people once to try to locate you.

• Time-barred collection attempts: While collectors can still attempt to collect on debts past the statute of limitations, they cannot sue you for these time-barred debts. In some states, they must inform you that the debt is too old to be enforced through litigation.

Your rights when dealing with debt collectors

Federal and state laws grant you significant rights when dealing with collection agencies. Knowing these rights empowers you to protect yourself from illegal practices.

• The right to debt validation: Within five days of first contacting you, a debt collector must send you a written notice containing specific information about the debt, including the amount owed, the creditor’s name, and a statement of your right to dispute the debt. If you dispute the debt in writing within 30 days, the collector must stop collection attempts until they send you verification, such as a copy of the original bill.

• The right to request they stop contacting you: You can send a written letter asking the debt collector to stop contacting you entirely. Once they receive this “cease and desist” letter, they can only contact you to confirm they’re stopping communications or to notify you of specific actions like filing a lawsuit. However, this doesn’t make the debt disappear—they can still sue you.

• The right to limit how they contact you: You can specify that you only want to be contacted by mail, at specific times, or at a certain phone number. You can also revoke permission for them to contact you at work.

• The right to privacy: Debt collectors cannot discuss your debt with third parties, except in very limited circumstances when trying to locate you. If they violate your privacy, they’ve broken the law.

• The right to sue for violations: If a debt collector violates the FDCPA, you can sue them in state or federal court within one year of the violation. If you win, you can recover actual damages (like lost wages or medical bills caused by their illegal actions), statutory damages up to $1,000, and attorney’s fees.

• The right to accurate credit reporting: Under the FCRA, you have the right to dispute inaccurate information on your credit report. If you dispute an item, the credit bureau must investigate, usually within 30 days, and remove information that cannot be verified.

Understanding the statute of limitations on debt

One of the most important concepts in debt collection is the statute of limitations—the time period during which a creditor or debt collector can legally sue you to collect a debt. This varies by state and type of debt, typically ranging from three to ten years.

Once the statute of limitations expires, the debt becomes “time-barred.” Collectors can still attempt to collect time-barred debts, but they cannot sue you or threaten to sue you. If they do sue, you can use the expired statute of limitations as a defense in court.

However, you must be extremely careful with time-barred debts. In many states, making even a small payment or acknowledging that you owe the debt can restart the statute of limitations clock, giving collectors a fresh opportunity to sue you. Before making any payment on an old debt, consider consulting with a consumer rights attorney.

It’s important to note that the statute of limitations is different from the credit reporting time limit. A debt can fall off your credit report after seven years but still be legally collectible if the statute of limitations in your state is longer than seven years.

Debt collectors sometimes try to trick consumers into restarting the clock by offering small settlement amounts or asking you to confirm old information about the debt. Be cautious about any contact regarding very old debts.

Common debt collection scenarios and what’s legal

Understanding specific situations can help you recognize whether a collector is operating within the law.

• Medical debt collection: Medical debts are frequently sold to collection agencies. As of 2023, new regulations provide additional protections for medical debt, including a one-year waiting period before medical debts can appear on credit reports. The collection of medical debt is subject to all the same FDCPA rules as other debts.

• Credit card debt: This is one of the most commonly sold types of debt. Collection agencies may offer to settle credit card debt for less than you owe, which is legal and often in your best interest to negotiate. However, forgiven debt over $600 may be reported to the IRS as taxable income.

• Student loan debt: Federal student loans have different rules than private debt. The federal government has greater collection powers, including the ability to garnish wages and tax refunds without a court judgment. Private student loans, however, are subject to standard debt collection laws.

• Payday loans: While legal in many states, payday loan collection can be aggressive. However, collectors still must follow all FDCPA rules. Some payday lenders make illegal threats about criminal prosecution, which is illegal—you cannot be arrested for failing to pay a payday loan.

• Zombie debts: Sometimes debt collectors purchase very old debts and attempt to collect on them, hoping you don’t know your rights. These “zombie debts” may be past the statute of limitations. If a collector contacts you about an old debt, request written verification and check your state’s statute of limitations before responding or making any payment.

What to do when contacted by a debt collector

If a collection agency contacts you, taking the right steps can protect your legal rights and help you resolve the situation effectively.

• Don’t ignore them: While it’s tempting to avoid collectors, ignoring them won’t make the debt go away and could result in a lawsuit. It’s better to address the situation proactively.

• Ask for written verification: Don’t provide any information or make any commitments during the first phone call. Instead, ask the collector to send you written verification of the debt, which they’re required to do within five days of initial contact. This notice should include the amount owed, the original creditor’s name, and your rights under the FDCPA.

• Verify the debt is yours: Check your records to confirm the debt is legitimate and the amount is correct. Debt collection records can contain errors, including wrong amounts, debts that aren’t yours, or debts you already paid. Identity theft can also result in fraudulent debts appearing in your name.

• Check the statute of limitations: Determine whether the debt is past your state’s statute of limitations. If it is, the collector cannot successfully sue you, though they can still attempt to collect.

• Dispute in writing if necessary: If the debt isn’t yours, the amount is wrong, or you have other legitimate disputes, send a dispute letter within 30 days of receiving the validation notice. The collector must stop collection efforts until they provide verification.

• Keep detailed records: Document every interaction with debt collectors, including dates, times, names of representatives, and what was discussed. Save all letters and emails. This documentation can be invaluable if you need to file a complaint or lawsuit.

• Know your negotiation leverage: Debt collectors often pay very little for debts, so they may be willing to settle for significantly less than the full amount. You can negotiate payment terms, reduced amounts, or payment-for-deletion agreements (where they remove the negative item from your credit report in exchange for payment).

• Get everything in writing: Before making any payment, get the payment agreement in writing. This should specify the amount you’re paying, whether it settles the debt in full, and any agreements about credit reporting.

The bottom line

It is completely legal for collection agencies to buy your debt and attempt to collect it. The debt buying industry is a legitimate part of the financial system, allowing creditors to recover some value from accounts they’ve written off while creating a business opportunity for collection agencies.

However, just because debt collection is legal doesn’t mean collectors can do whatever they want. Strong federal and state laws protect you from harassment, deception, and unfair practices. Debt collectors must operate within these legal boundaries, respecting your rights throughout the collection process.

Your best defense is knowledge. Understanding what collectors can and cannot do, knowing your rights, and taking appropriate action when contacted about a debt will help you navigate these situations effectively. Don’t let fear or embarrassment prevent you from standing up for your legal rights.

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