Banks, credit unions and other lenders sometimes sell delinquent debt for as little as cents on the dollar. They sell debt after deciding they cannot collect on the accounts. So-called "junk debt buyers" often purchase debt in bulk, meaning they pay a flat fee for hundreds or even thousands of delinquent loan accounts. After the purchase, the debt buyers become legal owners of the individual accounts, and and can file lawsuits to collect the entire amount due on each account.
Considerations
Although third-party debt collectors can file lawsuits, they may lack the documentation necessary to win in court. To win a debt lawsuit, debt collectors must show proof of the debt -- if the debtor shows up in court to challenge the suit. Debtors contesting a debt lawsuit can demand that the debt collector show proof of the debt such as copies of billing statements or the original credit application. In some instances, third-party debt collectors simply don't have the information. Original lenders may lose or misplace important documents related to old debt, or fail to properly transfer the information during the sale of the debt. Judges in debt lawsuits usually dismiss cases if the debt collector cannot verify the debt.
Strategy
Some third-party debt collectors sometimes file lawsuits soon after purchasing debts. Their primary goal, in some instances, is to win default judgments in court and then proceed to bank or wage garnishment. The third-party debt collectors know that a percentage of debtors will not show up in court to contest lawsuits, resulting in easy default judgments.
Notice
Debt collectors purchasing a debt must send a written notice to the debtor before filing a lawsuit or beginning other collection effort. The notice announces that the debt collector is the new owner of the debt and is demanding payment in full. However, the Fair Debt Collection Practices Act, a federal law, allows the debtor to challenge the notice by writing back to demand that the debt collector provide proof of the debt. Federal law prohibits the debt collector from continuing collection efforts or filing a lawsuit until sending the debtor verification of the debt.
Solutions
Debtors dealing with third-party debt collectors should not make payments until the debt collector provides proof of the debt. Even then, the debtor should consider consulting with a consumer affairs attorney for a legal opinion. For example, some debts are too old for consideration by courts under state laws. An attorney can advise about state statute of limitation laws that regulate how long debt collectors have to pursue a debt in court.
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