In the cat-and-mouse game between debtors and creditors, it’s no surprise that there are dishonest debt collectors. Many of my bankruptcy clients are well-acquainted with debt collectors, often having been harassed by them for years before coming to me. Among the illegal collection practices these collection firms employ are:

  • repeated collection calls that violate the Fair Debt Collection Practices Act ban on harrassment and after hours calls
  • failure to respond to consumer disputes of debt
  • farming debt to law firms for litigation without appropriate documentation
  • threatening consumers with lawsuits for debts where the statute of limitations has run out (generally four years in California, except for state tax debt which is 20 years)
  • collecting on debt where the debt buyer has no documentation
  • filing suit against debtors when they know the debtor won’t respond, giving them an automatic win

These firms get away with illegal and rule-bending tactics because their victims can’t afford to fight, and are almost always unaware of the laws designed to protect debtors from predatory practices. And, the IRS has begun to hire private debt collectors to collect tax debt, so there’s ever more of them out there. Here are three ways to stop debt collectors.

Don’t Ignore Collection Agency Correspondence and Lawsuits

Because it’s stressful and unpleasant to be reminded of debts owed, many debtors ignore notices from debt collection agencies and law firms. This is a bad idea because, when enough time has elapsed or a sufficient number of notices sent, the collection agency can (and often will) file a lawsuit against the debtor. Before you get to that point, a better approach is to negotiate with the debt collector. They obviously know you can’t pay what you owe; offer a smaller amount. Some will deal, some won’t. But, if you ignore the notices, hoping they’ll go away, the following may happen instead.

One day, a disheveled guy comes to your door, asks whether you answer to your name, and when you say “yes,” he hands you a summons in a state-court lawsuit seeking a money judgment for an unpaid debt. Once the summons has been “served” on you, you have 30 days to answer it.  You’re not going to answer, because it will cost you $400 to do so and you don’t really have a defense; you owe this money, you just can’t pay it. But, if you don’t answer in 30 days, then the attorneys may file a request for a default judgment.  That usually takes about a month to get. After they have the default judgment, they may take collection action. That includes placing a lien on your house, garnishing wages, levying accounts, and dragging you down to their office for deposition to find out your social security number and your intimate financial details.

Most debtors are (rightly) overwhelmed by notice of a lawsuit, and ignore it. This allows the collector to win by default when the debtor/defendant fails to answer. If you don’t know how to respond, then call a bankruptcy attorney.

Hire a Bankruptcy Attorney

Note that my second suggestion is to hire a bankruptcy attorney, not necessarily to file bankruptcy (which is suggestion 3). What’s the difference? I have many clients who may nor may not actually file bankruptcy. Their finances put them on tightrope between possibly being able to pay off their debt without bankruptcy or definitely needing to file bankruptcy — they need a little time (usually 1-2 years) to see how things play out. During that time, I have them tell all debt collectors to call me. I explain to the debt collector that my client has hired me for a bankruptcy, which we expect to file in the near future. The threatening calls and tactics usually stop then, most likely because the collector knows the debtor will now be fully informed of their rights and whether the collector is using any illegal tactics. Also during this time, I often negotiate with the debt collectors on accepting a settlement less than the full amount owed and something my client can afford.

File Bankruptcy

The ultimate way to stop debt collectors is to file bankruptcy. As soon as the bankruptcy petition is filed in US Bankruptcy, a federal injunction is issued on behalf of the person filing bankruptcy, that prohibits any of the debtor’s creditors from attempting to collect on a debt (for more detail on how the bankruptcy process works, read here). Honest debt collection agencies honor this injunction. But unscrupulous debt collectors don’t, and the difference can be spectacular.

I had a client with several “payday” loans, high-interest loans taken out against her next paycheck. One payday lender did not give addresses, only phone numbers. They called my client, demanding she repay the loan, even though she and I had phoned and told them she had filed bankruptcy. They told her that didn’t matter, that they were pursuing a criminal action against her and pay up or they would send marshals to her workplace to arrest her. The payday lender stopped talking to me, saying I did not represent her in the criminal matter.

Panic can set in on a debtor in such a case. Here’s how I calmed my client down: criminal actions can only be brought by a government agency, and indeed, once the government agency has started criminal charges, the private party has no more say in the matter.  So a private party’s threat to arrest you is an empty threat. I also sent a letter to the creditor via fax, asking it why I should not file a lawsuit alleging a violation of the automatic stay, and who is your agent for service of process? The harassing calls stopped after my letter.

Implication? Collection law is complex; most consumers know little about it. Debt collectors have large financial incentives to behave unethically and illegally because of consumer ignorance and often shame over their debt. This creates a cycle where collection abuse is rewarded. Break that cycle by educating yourself: here’s the Federal Trade Commission website, and the California Attorney General. Speak with a bankruptcy attorney about letting your creditors know that you’re not a defenseless target.

December 21, 2021