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What Collectors Can Legally Do to Collect on a Debt

Most debts, such as almost all credit card obligations, medical bills, and cell phone charges are “unsecured.” You do not have to put up any collateral such as your home or car to secure repayment. An unsecured creditor collecting a debt that is not owed to the government (for example, tax debts or federal student loans) can only legally do the following four things if you do not pay their debt:

1. Stop doing business with you. A credit card issuer can cancel your card or a dentist might refuse to let you continue as a patient. Usually, even if one merchant stops doing business with you, you can find someone else who will do so, on a cash basis or even on credit.

2. Report the delinquent debt to a credit bureau. The fact that you are behind on your bills will likely end up on your credit record. You cannot stop this, short of always being current on all of your bills. While this is unfortunate, it still may not make sense to prioritize this particular bill first just because it may be reported to a credit bureau.

Many creditors routinely report the status of all of their accounts each month to a credit bureau. When the account is turned over to a collection agency, this also may be indicated on your credit report. If that is true, the damage to your credit score has already happened. Paying the debt collector now will not do much to improve your credit rating and failing to pay will not likely do much more damage to your credit rating.

Whether or not the creditor reports to credit bureaus, a debt collector seeking to report an account must first attempt to contact you about the alleged debt before it does so. Where the account has not been reported by the creditor already, this notice from the debt collector may provide an opportunity to negotiate about an account before any credit reporting occurs.

3. Contact you to ask you to pay. Creditors will attempt to contact you to arrange for payments on overdue accounts. Your account may then be placed with debt collectors who also attempt to reach you. Traditionally most of these communications have been in writing or by phone, but collectors can also use email, text, direct messages via social media platforms, or other types of communication. New federal rules that took effect on November 30, 2021, will likely greatly increase the use of electronic communications by debt collectors. Below you will find several different sample letters that are effective in stopping a debt collector from contacting you if you want to avoid debt harassment or instruct the debt collector to stop attempting to contact you using certain types of communications (e.g., telling the debt collector to stop calling you). In addition, federal law prohibits third-party debt collectors from telling friends, relatives, employers, or other third parties about the debt they claim you owe.

4. File a lawsuit to collect the debt. It is hard to predict whether a particular creditor will actually sue on a past-due debt. How aggressively a collection agency seeks to collect the debt is not an indication of whether the creditor will sue.

If the creditor does sue you, you have a right to respond and raise defenses. Doing so may stop the creditor from pursuing the case. However, failing to respond to a lawsuit or failing to show up in court when required may result in a win by default for the creditor.

If the creditor does pursue a lawsuit to its conclusion (or you do not respond to the lawsuit and the creditor wins by default) and the judge rules that you owe the debt, the unsecured debt becomes a court judgment. A court judgment is a higher priority debt than the previous unsecured debt. After a judgment, the creditor may be able to use powerful collection tools such as wage or bank account garnishment (depending on state law), as discussed in Chapter 21.