Did you know your debt can take on a life of its own?
John Oliver dived into the the lifespan of debt earlier this summer on HBO’s “Last Week Tonight” by purchasing — and then forgiving — nearly $15 million in medical debt.
To show how easy it was to buy the debt for less than pennies on the dollar, Oliver created a company and paid $60,000 for 9,000 people’s debt.
Here’s our piece on the Debt Buying industry from last night. Your move, Oprah… https://t.co/yhZfbCuY5f
— John Oliver (@iamjohnoliver) June 6, 2016
When you stop paying off your debts, they don’t just go away. Aside from wrecking your credit score, unpaid debt can unleash a torrent of pesky collectors, including some who don’t play by the rules.
But there are certain points along the way — especially early in the process — where you can take action and stop your debt from morphing into a nightmare.
Here’s what you need to know.
Addressing Debt Earlier is Better
The first three to six months are critical in your debt’s lifespan. Within this timeframe, your debt is still in the hands of its original owner — your bank, your credit card company or another lender.
However, if you default on a loan or stop making credit card payments and the original creditor can’t get you to pay up, it’ll eventually sell your debt to a debt collection agency.
And this is when things get trickier.
“A lot of people that come to us have kind of put their head in the sand and they just ignore the problem,” says Thomas Nitzsche, a spokesman for ClearPoint Credit Counseling, a nonprofit finance education group.
“That can limit their options as far as what they can do through debt management or credit counseling or an in-house financial hardship program with creditors.”
When the original creditor owns your debt, it’s easier to get on a payment plan or negotiate lower interest rates. You may also be able to negotiate with your creditor to waive late and overdraft fees.
“It’s a night and day difference, early acting,” Nitzsche explains. “Our average client that starts a debt management program increases their credit score by 106 points within the first 36 months, but typically that is only successful if the person reaches out before their debt goes to collections.”
Your lender will sell your debt for a discount because it wants to get so-called bad debts off its books and because it can write off the debt as a loss come tax season.
Nitzsche says if you’re making monthly payments, but they fall below the minimum payment amount, your lender will consider it a missed payment and eventually notify you that it’s sending your debt to collections.
How Do Debt Collectors Get My Debt?
Now a debt collection agency has your debt.
This third-party company you’ve probably never heard of will begin contacting you — sometimes frequently and aggressively — to get you to pay.
They’ll likely report your debt as “in collection” to the three major credit bureaus: Equifax, TransUnion and Experian — which will hurt your credit score.
These debt collection agencies pay the bank a fraction of the amount you owe to take the debt off its hands. However, they aim to make money by recouping the entire amount.
Anyone who obtains the right licenses from their state can become a debt collector. These licenses typically come with steep fees and bond requirements, sometimes between $5,000 and $20,000, and the ability to obtain financing in order to buy thousands of dollars of debt at once.
Debt collection agencies are going to make much more of an effort to get you to repay your debt than the original creditor.
An agency may file a lawsuit and hope you don’t show up in court. In this case, the agencies win by default and can start garnishing your wages, so don’t ignore any legal paperwork you receive.
There’s no limit to the number of times your debt will be bought and sold. It will keep getting passed along from agency to agency, each time for a lower price. The longer you go without paying, the less your debt is worth to these companies.
Here’s another opportunity for you to stop debt dead in its tracks. Debt collectors sometimes have more flexibility than your original creditor to offer you a settlement or a monthly payment plan.
Let’s say a deceased relative leaves you $1,000, but you owe $2,000. If you offer the collection agency $1,000, it may just take it. After all, some money is better than none.
Be careful, though; forgiven debt can have income tax implications.
Watch For Debt-Collection Scams
No matter what stage your debt is in, watch out for scams.
If you’re looking into debt consolidation or debt counseling programs, do your research. It’s as simple as Googling the company’s name to see how long they’ve been around and what kind of reviews they’ve gotten, Nitzsche says.
Consider working with nonprofits, which typically don’t have big advertising budgets. In other words, you won’t see a “Get out of debt fast!” infomercial on late-night TV from a legitimate debt counseling organization, he says.
Also, if you’re judgment proof, it’s much harder for debt collection agencies to come after you. When you’re judgment proof, you don’t have any wages for them to garnish, or your income comes from the government in the form of public assistance.
Knowing the statute of limitations for debt is also important. Nitzsche says this varies by state and type of debt, but generally ranges from three to 15 years.
After the statute of limitations has passed, debt collectors can’t sue you, but they can still ask you to repay the money.
Know Your Rights
If you suspect a creditor is playing outside the law, submit a complaint with the Consumer Finance Protection Bureau or your state’s attorney general.
For starters, debt collectors can’t contact you at an unusual time or place — like late at night, early in the morning or at work if you’re not allowed to take personal calls.
Agencies cannot harass or threaten you with violence or arrest. Or use profane language. Or call repeatedly.
Collectors can’t pretend to be law enforcement or any other government official.
A debt collector can contact other people, but only to ask how to reach you — not publicize your debt or discuss how much you owe. The only people an agency can speak to about your debt is you, your spouse and your attorney.
If a collector knows you have an attorney, it cannot contact you instead.
If you tell one in writing to stop contacting you, it has to honor your request, except to tell you it will stop contacting you — or to inform you it’s taking legal action against you.
Agencies are also required to tell you some basic information about the debt, including the name of the creditor, amount owed and how you can dispute the debt or verify it.
Your turn: Have you ever been contacted by a debt collector?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.