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Michelle Minton had never felt so scared or humiliated in her life. The 42-year-old was at home with her two toddlers in Springville, New York, one morning when the phone rang. The caller, who said he was from a collection agency, immediately demanded that she pay the $2,100 she owed in credit card debt. Michelle racked her brain: Had she missed a payment? Was it something she charged before she got married? Nothing came to mind. "I think you must have the wrong person," she said calmly. That's when things turned nasty. "Listen, there's already a judgment against you," the man warned. "If you don't give me the money right now, the police are ready to arrest you and throw you in jail. And if your husband can't get home in time, social services will take your children." Horrified at the thought, Michelle panicked and gave the caller her checking account number. "When I hung up the phone, I was shaking and crying, and so were my kids," she says. "I felt like I had just been robbed."
In fact, she had been. The outstanding balance belonged to someone else with the same name, and the caller was just one of a growing number of collectors who berate, badger, and bully consumers into paying debts that aren't theirs in the first place. By the time Michelle pulled herself together and called the bank to freeze her account, the money was already gone.
Each year thousands of people are similarly victimized by fraudulent collectors, so intimidated by abusive tactics that they often pay up simply to end the harassment of themselves, their employers, family, and friends. "Operators like these have mastered the art of making people really, really afraid," says Bud Hibbs, a consumer advocate in Fort Worth, Texas, who runs the Web site ConsumerJustice.com. More people complain to the Federal Trade Commission (FTC) about debt collectors than about any other industry, and with the economic downturn those numbers are rising: The FTC received some 45,000 complaints in the first six months of 2009, a 20 percent jump compared with the same period the year before.
Even if you are behind on your bills, you don't have to put up with foul play. The Fair Debt Collection Practices Act, as well state laws, provides strict guidelines that bill collectors must follow. They also impose penalties for any violations. "It's important to remember you have rights," says Jean Chatzky, personal finance expert and author of the newly revised Pay It Down! From Debt to Wealth on $10 a Day (Portfolio Trade). Michelle filed papers with the state attorney general's office, and after several months it recently brought charges against a dozen collection agencies in northern New York, including the one that contacted her. "I'm so glad they're going to see their day in court," she says. Your best move? Learn how to recognize—and fight back—when sleazy collectors cross the line so you won't get scammed in the first place.
Collectors routinely phone anyone in the country with the same name as the one on the debt without checking to make sure it's the person who owes the money. So as soon as you get that cold call, ask for the collector's name and address—and then hang up. By law you have 30 days to write to the agency and ask for verification that the debt is yours. Send your letter registered mail or, if you're faxing, go to a store that will give you a dated, time-stamped receipt, such as Office Depot or Staples. The collector must send you the name and address of the company to which the money is owed, as well as notify you of your right to dispute the claim in part or in full. If the debt isn't yours, the agency must cease collection efforts altogether.
The phone rings incessantly at all hours, at home and at work, even though you've asked the collector not to contact you there. He's also harassing family members, friends, and even your boss and telling them you're a deadbeat. The law is clear: Collectors are allowed to call only between 8 a.m. and 9 p.m., and they must honor a written request to stop calling. They may not contact you again except to inform you that the creditor intends to take some action, such as filing a lawsuit. As for calling your parents or your employer, collectors may contact a third party to get your address and phone number, but are prohibited from discussing your debt. Write to the agency stating that you will file a complaint with your state attorney general if it doesn't stop immediately. For more information, call the National Consumer Law Center at 617-542-8010 to ask for the free brochure "What You Should Know About Debt Collection," or visit consumerlaw.org and click on the For Consumers link.
Bullying collectors love to intimidate consumers by telling them their debts will tarnish their credit report and ruin their rating for years, and may also threaten to spread the bad word to your mortgage bank or other lenders. Sometimes they even pose as credit bureau employees to make themselves sound more official. Or they make nice and promise to clean up your report if you pay up pronto. Legitimate debts that go to collections do become part of your credit history, but you don't have to take the rap for ones you're not responsible for. Once you file a dispute with the agency, it must report that to the credit bureaus. If you receive verification that the debt isn't yours, you need to notify all three national credit bureaus in writing and ask them to correct your records. For help on disputing credit report errors, go to ftc.gov.
If you do owe money, never make a payment on an old debt until you verify that the statute of limitations—typically seven years—hasn't expired. "In many states a new payment will restart the time period," says Hibbs. "That means you'll be responsible for the whole debt, no matter how ancient." But if the debt is valid, try negotiating. Chatzky advises offering to pay 50 percent if it's a recent debt, and 25 percent if it's several years old. "Some collectors have paid a pittance for your debt, so they're not interested in spending a lot of time getting the money," says Chatzky. "As a result, they'll often settle for far less than you owe." Finally, go to AnnualCreditReport.com once a year to view your record (it's free) and update it as needed so that it reflects any debts you've settled.
This may be a bill collector's favorite line. They want you to think they can wangle the money from you, so you might as well just pay on the spot. But wages can be garnished only when an original creditor takes you to court and wins a judgment against you. That's why you should never give out your bank account number or other financial information that would allow scam artists to rip you off.
This is the ultimate threat, but it's a big fat lie. Owing money is not a crime, and there is no debtors' prison in the U.S. So the next time you hear this line, respond with a hardball tactic of your own: Tell the collector you know that this type of behavior is illegal, and that you will promptly contact the FTC and your state attorney general's office to file a complaint. Then be sure to do so. The more you fight back, the more protection you'll have.
Bill collectors basically come in two flavors. The first type are legitimate third-party agencies that work directly for banks, credit card companies, retailers, and other businesses. They go after severely overdue bills by sending formal letters and keep up to 25 percent of whatever they collect. "These guys are on the straight and narrow," says consumer advocate Bud Hibbs. "Otherwise, companies like Sears and Macy's wouldn't hire them."
Then there are agencies that buy bundles of old, often poorly documented debts for as little as pennies on the dollar, which means they can reap profits even if they recoup only a tiny fraction of the debt. This year more than $100 billion of such so-called "zombie" debt is expected to be sold to collection agencies, up from virtually nothing a decade ago. "Creditors and consolidators are willing to sell on the cheap because they assume they'll never get paid and have already written off the losses," explains Hibbs. These are the collectors you should worry about. They're just after the money, and they'll stoop to intimidation and threats to get it.
Originally published in the May 2010 issue of Family Circle magazine.