Debt Collection

A debt arises when one party (the creditor) loans money to another party (the debtor) with an expectation of being paid back at a later date (usually with interest). At times a person will find himself burdened with more debt than he can handle; however, all debts must be repaid according to the terms of the loan contract, even if economic hardships or other problems arise for the debtor! This means that a debtor who finds himself in an economic tough time should immediately:

• Contact each of his creditors and explain the situation.
• Try to work out a payment plan that, while different from the one originally agreed upon, will be feasible for the debtor and satisfactory for the creditor.
• Stick to it! Although creditors are usually eager to work with their debtors to solve problems, they may lose patience if a debtor often reneges on newly formed payment plans.
• Consider contacting a credit counseling service. This service works out a payment plan for the debtor, and distributes the actual payments to the creditors.

Other methods of dealing with debt include consolidating debt through loans or declaration of bankruptcy. These are steps with serious consequences and should be taken only after consultation with an attorney.

Although working toward a solution is advantageous for both sides, if a debtor (person who owes the money) fails to pay back the creditor (person who has lent the money), the creditor will likely take action to try to get his or her money back.

Dunning is the creditor’s practice of trying to encourage the debtor to pay back debts. This practice is entirely legal, except when the creditor:

• Calls the debtor at home more than two times in each 7-day period or at any other place in each 30-day period for each debt.
• Calls the debtor and does not identify himself or that he is calling on behalf of the creditor.
• Sends collection notices to the debtor that openly indicate/imply that the person is in debt.
• Tells anyone about the debt in hopes of intimidating the debtor into paying.
• Contacts the debtor directly when the creditor has been notified to communicate only with the debtor’s attorney.
• Calls the debtor outside of normal waking hours (approximately 8am to 9pm).
• Causes the debtor to be charged for long distance phone calls.
• Falsely threatens to take legal action.
• Threatens to use violence.
• Uses obscene language.

For telephone, gas and electric utility companies, however, some exceptions are made.

If creditors engage in illegal dunning practices, they should be reported to the Office of the Attorney General (617) 727-8400.

The following are lawful methods of debt collecting for debts arising from a court order or adjudication:

• Set-Off: A bank where a debtor has funds deposited and to which a debtor owes money withdraws money from the debtor’s account(s) to pay off the overdue debt. The bank does not have to go to court to do this, but it must notify the debtor in writing when it has “set-off” the account.
• Lien: If agreed upon by both parties prior to a loan contract, a lien allows a creditor to take action against a debtor in the event of unpaid debt. This usually occurs by one of two methods:

1. Foreclosure: A creditor takes ownership of a delinquent debtor’s house. The creditor usually sells the house to pay off the balance of the debt, and the debtor is forced to move out.

2. Repossession: A creditor (usually a bank) takes possession of whatever property the debtor has used as collateral for a loan in the event the debtor is delinquent. To do this, the creditor must take the following steps:

a) Inform the debtor within 10 days of the missed payment that the debtor has 21 days to cure the default (bring the loan up to date) or repossession will occur.

b) If the default is not cured, the creditor can take possession of the property. However, the creditor must notify the debtor that the debtor has the right to regain possession within 20 days and notify how this can occur.

If the debtor cannot meet the terms to regain possession, the creditor may resell the property.

EXCEPTION: The Homestead Act allows homeowners to protect their principal place of residence from collections actions that might otherwise force the sale of the home to pay an outstanding debt. In MA, the homestead exemption is $500,000. This is not applicable for debts accumulated prior to purchase of home, court ordered support payments to spouse or children, debts for taxes, or debits on 1st/2nd mortgages.

IMPORTANT: If the unpaid balance is less than $2,000, the debtor is not responsible if the property is sold for less than the amount owed. If the balance owed is greater than $2,000, the debtor is financially responsible for any discrepancy between the amount owed and the resale value. If the property is resold for more money than is owed, the creditor MUST pay the surplus to the debtor without the debtor having to ask for the money. The creditor may always resort to a lawsuit to make the debtor pay back the balance owed, even if this means taking possession of other assets.

Understanding Debt Collection Agencies

If you do not pay a bill, over time, your outstanding bill gets sold to debt collector agencies. Debt collection agencies buy outstanding bills in bulk at a very low price, and then bring people to court to collect their “debts”

Some tips on how to face debt collection agencies in court:
Always show up for your trial
Ask the lawyer to itemize each cost associated with the amount they claim you owe: By the time your debt get to the debt collection agency, it has been passed along many hands, and often the debt collection agency cannot itemize the bill
Bring all documentation you have

Credit Disputes

Congress passed the Fair Credit Billing Act in 1974 to help consumers resolve disputes with creditors and to ensure fair handling of credit accounts. The Act generally applies only to “open end” credit accounts, which include credit cards, revolving charge accounts (such as department store accounts), and overdraft checking. The Act covers the periodic bills received for such accounts, but does not apply to loans or credit sales that are paid according to a fixed schedule until the entire amount is paid back.

When a mistake appears on a bill, the customer must send a notice to the address provided on the bill for billing error notices (and not, for example, directly to the store, unless that’s where the bill says it should be sent) within 60 days after the bill containing the error was mailed.  The letter must include:

1. The customer’s name and account number.
2. A statement that the customer believes there has been a billing error and the dollar amount involved.
3. The reasons why the customer believes there is a mistake.

It is a good idea to send the letter by certified mail, with a return receipt requested. The letter claiming a billing error must be acknowledged by the creditor in writing within 30 days after it is received, unless the problem is resolved within that time. In any case, within two billing cycles (but not more than 90 days), the creditor must conduct a reasonable investigation and either correct the mistake or explain why he believes the bill to be correct.

A customer may withhold payment of the amount in dispute including the affected portions of minimum payments and finance charges until the dispute is resolved. The customer is required to pay any part of the bill that is not disputed.

Even after the dispute settlement procedure has ended, a customer may still feel the bill is wrong. If this happens, write the creditor within 10 days after receiving the explanation and state the reasons for refusing to pay the disputed amount. The creditor may begin collections procedure. If the creditor reports the individual to a credit bureau as a delinquent, the creditor must also report that the individual does not believe he owes the money.

Credit History

A credit history is a collection of data concerning a person’s previous debts and whether or not these debts were paid satisfactorily. This history is usually compiled by specialized agencies and used by potential creditors as a collection of facts, not necessarily as an evaluation.

The agencies that gather and sell this information are called “Consumer Reporting Agencies” or CRAs. The most common type of CRA is the credit bureau. The information sold by CRA’s to creditors, employers, insurers, and other businesses is called a “consumer report.” This report generally contains information about where a person lives and his bill-paying habits.

If a person is denied credit, he has the right to be told by the creditor the specific reasons for the credit denial if he asks.  If information in a credit report was used to deny credit, the person has the right to be told by the creditor which CRA prepared the report,  and also has the right to obtain a free copy of his report from that CRA .

Massachusetts residents are also entitled to request one free copy of their credit report per CRA per calendar year, and may request an additional copy at any time for a reasonable fee.

A person is protected from the circulation of inaccurate or obsolete information that may affect his credit standing, and he may dispute the accuracy of any statement contained in his file. If the information in a person’s file is inaccurate or incomplete, the person must notify the CRA in writing.  The CRA must investigate and, if necessary, correct each disputed entry in a reasonable amount of time. If a person cannot resolve the dispute with the CRA, he is entitled to enter a statement (100 words maximum) in the file and have it included in all future reports.

Negative information that is more than seven years old cannot be included in the credit report. The main exceptions to this rule include bankruptcy, which may be reported for up to ten years; criminal convictions, which may be reported at any time; and lawsuits or unpaid judgments against the individual, which can be reported until the statute of limitations runs out.

Questions and complaints about credit or the debt collection practices of collection agencies and banks should be directed to:

Massachusetts Division of Banks
Consumer Assistance Office
One South Station
Boston, Massachusetts 02110

(617) 956-1500 ext. 501