Be Like Mike and Avoid Debt Collectors

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The King of Pop’s real estate bubble is still intact. Michael Jackson cut a last minute deal yesterday to keep his 2,500 acre Santa Barbara wonderland, Neverland Ranch, despite the fact he owes creditors $24.5 million dollars. Jackson’s lawyer, L. Londell McMillan announced that the pop star reached a “confidential” agreement with the Fortress Investment Group LLC. to refinance his outstanding loan. The property was scheduled to go on the auction block next week. 

Michael Jackson may be an, um, special case, but it certainly doesn’t take a multi-million dollar debt to send a collection agency a- knocking. As the economy wanes, the business of debt collection is in a boom cycle. Unfortunately, that means an increase in shady debt recovery tactics. Despite the fact the Fair Debt Collection Practices Act “prohibits misleading representations, harassments, calling at all hours, calling neighbors, racial and other slurs, abusive language and the collection on a debt that’s not owed,” says Kristen Keefe, staff attorney at the Empire Justice Center in New York, abuse of the act is more prolific than ever. The Federal Trade Commission reported 69,204 complaints against debt collectors in 2006, the most for any industry the FTC monitors. “There’s probably more debt collection abuse now,” says Keefe. “Because there’s so much debt and debt buying has become so prolific.”

Many complaints made to the Better Business Bureau (BBB) allege that “the collector was rude over the phone, hounded the debtor, told family members of the debt owed, or failed to provide proof of the debt owed,” says Alison Preszler of the BBB. One of the most common complaints last year was collection agents trying to claim “zombie debt,” after the debt had already expired. The statute of limitations to file a lawsuit on debt is six years, but “debt buyers are buying debt that’s seven years old and intimidating people to make payments,” says Keefe. However, keep this in mind: If a single payment is made on a zombie debt, the statute of limitations starts again for six more years, exposing the debtor to a potential lawsuit all over again. 

In addition to zombie debt, some collection agencies also resort to “sewer service” where they deliver a court summons to an old address. In order for a lawsuit to be filed, papers must be served. But if a debt collector sends a notice to an old address, a person easily might not know of the lawsuit until their bank account is frozen. Then, “you have to file a motion to vacate the judgment based on the notion [you] weren’t properly served,” says Keefe. And because it’s become easier through automation to attach restraints to peoples’ bank accounts, collectors are suing on smaller amounts of debt. “Five years ago if a client had $5,000 of credit card debt, I’d tell them not to worry about being sued,” says Keefe. “Now, I would never say that.” One way to combat sewer service is to take advantage of your free yearly credit report from the three reporting agencies, Equifax (EFX), Experian and TransUnion, to monitor what’s been filed against you. If you did have debts, after seven years they shouldn’t appear on your credit report, so it is important to confirm old debts are obsolete to prevent zombie debt collection. 

If you do receive a notice from a debt collector, under the Fair Debt Collection Practices Act you have 30 days to dispute the debt and then the collector is required to cease collection proceedings. (The window for disputing a debt never closes, but you’ll have to simultaneously deal with the collector.) “You always have to dispute the debt in writing,” says Keefe. And if you do not have the means to pay a debt, you are also legally entitled to stop the collector from contacting you through telephone or mail. “You can send a letter saying ‘I have no money, stop contacting me,’” says Keefe. “They might file a lawsuit, but they’re supposed to stop contacting you about collection.” Because social security income and veteran’s benefits are exempt from collection, Keefe recommends people whose only income is exempt to be aware of that fact. “Fine, the [collection agency] can sue you," she says. "But they’re not going to collect."

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