Your creditors will initiate debt recovery procedures when you fail to repay your debts. Some creditors will transfer your debt to the company's collection department while others will write off the balance you owe as a tax loss and transfer your unpaid debt to a third-party collection agency. The process may differ depending on the type of debt you owe. Consumer protection laws in the United States regulate the debt collection industry to prevent abuse and harassment.
Process
The recovery process for secured debt differs significantly from that of unsecured debt. When you owe a secured debt to a creditor, you pledged property that you own as security for the debt. This is known as "collateral." In the event that you fail to meet your payment obligations, your creditor has the right to claim the collateral as payment. One example of this process is a vehicle repossession. Unsecured creditors, however, have no legal claim to any property that you own and must use other methods, such as telephone calls and letters, to collect the unpaid debt.
Legal Action
If you continually ignore a creditor's request for payment, it has the right to take legal action against you. For secured creditors, legal action consists of seizing your collateral. If your debt is unsecured, however, your creditor may sue you. If a creditor wins a lawsuit against an individual who owes money, the court will enter a judgment against the debtor for the amount he owes plus the creditor's court costs and attorney fees. After a creditor obtains a judgment, it may take further collection action such as garnishing your bank accounts and wages or placing a lien against your property.
Time Frame
Secured creditors may seize collateral at any time. Unsecured creditors, however, are limited in the amount of time they have to recover debts through legal means. Once your payments on the debt are 180 days late, the statute of limitations for debt recovery begins. Each state's statute of limitations differs depending on the type of debt that you owe. After the statute of limitations expires, the debt becomes time-barred and the creditor no longer has the legal right to file a lawsuit against you in an attempt to force you to pay the debt.
Effects
In addition to the potential for a lawsuit and judgment, debt recovery measures can also damage your credit rating. If your creditor transfers or sells the balance you owe to a collection agency, the collection agency has the right to insert its ownership of the debt into your credit file. According to the Fair Credit Reporting Act, negative credit information, such as a collection account, can remain a part of your credit record for up to seven years. This lowers your credit score and reflects badly upon you when lenders, employers, insurance providers and other businesses review your credit history.
Considerations
The Fair Debt Collection Practices Act was signed into law in 1977 to prevent debt recovery agents from utilizing abusive or frightening tactics to collect consumer debts.The FDCPA prohibits debt collectors from threatening debtors, using vulgar language, harassing debtors with repeated telephone calls over a short period of time and discussing a debtor's financial obligation with anyone other than the debtor herself. Should a debt collector violate your rights when attempting to recover a debt, the FDCPA gives you the right to file a lawsuit against the company and seek legal damages.
References
- The State Bar of California: What Can I Do if I Can't Pay My Debts?
- Santa Clara University: Enforcement of Judgment
- MSN Money: Is There a Statute of Limitations on Debt?
- Federal Trade Commission: The Fair Credit Reporting Act (Section 605)
- Federal Trade Commission: The Fair Debt Collection Practices Act (Section 806/813)
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