1188: Debt Collection | Skeptical Sunday

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Speaker 1 or search for us in your Spotify app to get started. It sucks being behind on your bills.
One reason it sucks is that you have to deal with debt collectors.

Speaker 1 If you've ever been behind on payments, you know all about the sick feeling you get in your stomach worrying about these debt collectors.

Speaker 1 You get letters in the mail, your phone rings at all hours with people who only speak back after you say hello three times.

Speaker 1 They talk to you about legal action, charge-offs, maybe even the scariest word of all, garnishment. Talking to a debt collector is about as fun as getting a root canal.

Speaker 1 The whole process can feel really intimidating, even if you have every intention of paying back the money, but you just can't right now.

Speaker 1 One of the reasons that it can be so scary is that you just don't know where the process is going. You're positive it's going to get worse.
You're just not sure how.

Speaker 1 What is the worst case scenario you're looking at if you have debt collectors breathing down your neck? What are your rights? Can they really take you to court? More to the point, will they?

Speaker 1 Are they bluffing or is your catastrophic anxiety actually warranted? Here to help me garnish this episode with some actual expertise is writer and researcher. and former deadbeat Nick Pell.

Speaker 1 Nick, how you doing today?

Speaker 3 Emphasis on the former. Yeah.
Doing great, man.

Speaker 3 Really fired up to talk about this topic because it astonishes me how little people know about this and how scared they are over nothing, really.

Speaker 1 Just so people know, one of the reasons I asked Nick to help me out is you have some interesting experiences with debt collectors, yeah?

Speaker 3 Yeah, I've had them owing me money.

Speaker 1 You've told me about this in the past, but and trust me, guys, there's more here than just Nick bragging about pulling an Uno reverse card on debt collectors. So let's start at the beginning.

Speaker 1 What happens when you stop paying your credit card bills for whatever reason?

Speaker 3 At first, nothing. After you're 30 days late, you're going to get a warning and your credit score is going to take a significant hit.

Speaker 3 It might be over 100 points, depending on where your credit score is. If you keep not paying, you're going to get more attempts at contact from the credit card company.

Speaker 3 And where things really begin to change is when they do what's called a charge-off.

Speaker 1 So what is a charge-off?

Speaker 3 I've never heard of this. Well, I have because I'm kind of a serial credit delinquent.
Not anymore, guys. I pay my bills like a grown-up.

Speaker 3 Okay. Charge-off is what they call it when the credit card company gets tired of trying to collect their debt.
They assume you're not going to pay it.

Speaker 3 So for them, it's better off to use it on their financials as bad debt. They sell it to these third-party debt collectors.

Speaker 3 And that really is the thing that most people are talking about when they talk about debt collectors.

Speaker 3 They mean third-party debt collectors, not, you know, Chase or Citibank calling you trying to get their money. Your credit card company is not covered.

Speaker 3 by the Fair Debt Collection Practices Act, which is the main law that governs debt collection.

Speaker 1 Okay, we'll talk a a little bit more about that in a bit because I have questions. But why would anybody want to buy your bad debt?

Speaker 1 Doesn't it seem like a bad idea to go and purchase people who can't pay the bill? You're basically they're buying your bill of goods and you've already proven that you can't pay.

Speaker 1 Why would anybody buy that?

Speaker 3 Yeah, they're buying your delinquency. So the credit card companies sell it because it's better to get something instead of nothing.
They sell it. They don't just give it away.

Speaker 3 As for why the debt collectors buy it, they buy it at a pretty steep discount because they think they can collect it. So say you owe the credit card company $5,000.

Speaker 3 The collection agency might pay $500 for that. Wow.

Speaker 1 Okay, that's crazy. They're paying 10% of your debt for the privilege of trying to collect the whole thing, maybe.

Speaker 3 Yeah, and 10% is the high end, by the way. They might pay 50 bucks for it.

Speaker 3 So from their perspective, it makes good business sense because if they get the whole thing, That's a serious return on their money.

Speaker 3 It also means they have tons of room to negotiate in terms of settling the case. So if they paid 500 bucks for your credit card debt and then you pay them 2,500, they're still up $2,000.

Speaker 3 It's slightly more complicated than that because obviously they have overhead that isn't just buying your debt.

Speaker 3 But in terms of keeping the math simple, I think listeners have gotten the point about why this is a lucrative business model.

Speaker 1 Sure. So the third-party debt collectors are now the legal owners of your debt?

Speaker 3 Sometimes. It could be owned by one company who then hires another company to collect it on their behalf.

Speaker 3 There are companies whose whole business model is just owning a lot of debt, and there are others whose business model is collecting that debt, and some companies do both.

Speaker 3 I think for the purposes of our discussion, the difference is kind of irrelevant. First of all, we're only really talking about the collection agencies.

Speaker 3 Second, you're almost never going to deal with a third party. whose only skin in the game is owning your debt.

Speaker 3 And finally, people who aren't trying to collect your debt are not going to be covered by the Fair Debt Collection Practices Act because they're not trying to collect the debt.

Speaker 1 Got it. So the main takeaway here is that the credit card company assumes, okay, this guy's never going to cough up the money.
They're tired of dealing with it and getting stonewalled.

Speaker 1 So they hand it off to some maybe sketchy company who calls you six times during dinner.

Speaker 3 They actually can't call you six times during dinner. That's one of the provisions of the Fair Debt Collection Practices Act.

Speaker 1 Okay, so this is where it starts, I assume, getting really sexy. So the Fair Debt Collection Practices Act.
Make sure you're you're sitting down, people. It's going to get exciting over here.

Speaker 1 This is a real consumer protection law with some actual teeth. One of the reasons these companies can bully people and get away with it is because people don't know the law.

Speaker 1 They don't know their rights. They don't know where they can actually push back on these guys.

Speaker 1 So let's start by talking about what they can do, because I think that what they cannot do is really where it starts getting interesting.

Speaker 1 And of course, where people can take action if they're being harassed by these guys.

Speaker 3 So what they can do is actually not a lot. They can call you between 8 a.m.
and 9 p.m. local time.
They can contact third parties once and only to find out where you live.

Speaker 3 They can send written notices telling you that you owe them money, but those written notices have to let you know that you have 30 days to dispute the debt.

Speaker 1 So read the fine print, people. Yeah.
So it's important for people to know. that you can indeed dispute a debt.

Speaker 1 And just because someone calls you and says you owe them money doesn't actually mean that you owe them money.

Speaker 1 If I came up to you in the street, you're getting your Cinnabon on or whatever, and I say, hey, man, remember that 50 bucks you owe your brother? Well, you owe that to me now. You got to pay me.

Speaker 1 You'd probably do something to verify whether or not that was even true. And so the same principle applies here.

Speaker 3 Right. Finally, they can do the thing everyone is worried about when it comes to debt.
They can sue you.

Speaker 3 They have to sue you in the correct venue, which is either where you live or where you sign the contract.

Speaker 1 So what about the stuff that they cannot do?

Speaker 1 Because I'm going to guess that at least one person is going to listen to this and think, wait, wait, somebody trying to collect money is definitely doing that to me or did do that to me I might have a case against them and you know there probably is someone out there that's going to start a case after they listen to this episode

Speaker 3 because there are so few things they cannot do and all of these are totally reasonable restrictions completely unobjectionable and yet there are over a hundred thousand complaints about fair debt collection practices acts violations every year.

Speaker 1 Honestly, it doesn't surprise me. Mostly because I've known guys who have worked for debt collectors to earn money over summer break in college or something, for example.

Speaker 1 But a lot of guys that those guys worked with, not exactly elite human capital. Let's put it that way.
A lot of these companies, they pay on commission.

Speaker 1 And for the most part, it seems like you get briefed on the Fair Debt Collection Practices Act one time during your orientation at the YMCA or whatever.

Speaker 1 And then you're just turned loose with a headset that you bring home. And it's a great little gig if you're smart.
and you know how to negotiate.

Speaker 1 But I think for a lot of people, it's just a disaster waiting to happen.

Speaker 3 It's not just how educated they are on the act itself. It comes down to temperament.
Can the agents keep their cool when you're being a jerk or just refusing to pay?

Speaker 3 Can they do that on 20 or 200 calls a day?

Speaker 1 Yeah, some of the guys doing this are total pros in fairness. I mean, I've definitely had experience talking with people for debt stuff back in the day or on behalf of clients when I was a lawyer.

Speaker 1 And I was like, okay, these people are legit. But you can turn the tables on them and have them owing you money, which is kind of awesome.
And I'd never really thought about that.

Speaker 3 Yeah, so the name the Fair Debt Collection Practices Act sounds super boring, but it's the main law governing what debt collectors are allowed to do and say in pursuit of their money.

Speaker 3 It really limits what they're allowed to do. And if you play your cards right, you can actually turn the tables on your debt collectors and have them owing you money.

Speaker 1 I've heard you talk about this before, just in casual conversation, but how can you have debt collectors actually owing you money?

Speaker 1 That's, I think a lot of people's ears are perking up when they hear this because, well, first of all, I think if somebody's bugging you all the time, sticking it to them is pretty appealing.

Speaker 3 Yeah, so every complaint, well, every legitimate complaint you make against a debt collector under the Fair Debt Collection Practices Act costs them $1,000 if you win in court.

Speaker 3 So if you get a win, that's $1,000 in your pocket.

Speaker 1 But how hard is it to get a win? I mean, you're talking about a court case. Sheesh, you know?

Speaker 3 I've gotten two. It's actually pretty cut and dried.
The thing that sucks is you can only get $1,000. You know, you can't like.
take them to court for seven violations at once.

Speaker 3 You get a thousand bucks in statutory damages unless you, you know, damages are capped at $1,000 unless you can prove real damages, not just that they violated the law.

Speaker 3 The good news, though, is you can probably double dip on the federal violation and whatever version of it your state has, because there's a really good chance that in violating federal law, they also violated state law.

Speaker 1 I see. So capped at $1,000 unless you can prove real damages.
And I think just in case people are wondering what that means, this is a hypothetical situation.

Speaker 1 Let's say they call your employer and tell your employer, hey, you got this new hire. He's a real deadbeat.
He owes this credit card company $10,000 and he didn't pay.

Speaker 1 And the employer's like, oh, and you're working with the money in my business. I got to let you go.
Now you've lost your job because of these guys.

Speaker 1 So that's a real damage that wouldn't probably be capped at a thousand bucks, right? You can say, hey, I was counting on this job to feed my kids. Now I have real damages.
Okay, that's interesting.

Speaker 1 And you're saying there's a good chance that if they violated federal law, they've also violated the state law. So have you actually successfully sued a creditor and got them to pay you?

Speaker 1 Is that what happened?

Speaker 3 Yeah, I've done it twice.

Speaker 1 So what did they do to you and how did you get your money?

Speaker 3 They called my half-brother and told him how much I owed. Whoa.
The hilarious thing is that in my case, they were kind of extra stupid about it. They left a voicemail.
Okay.

Speaker 1 That was my next question.

Speaker 3 Yeah, all you had to do was send me a copy of the voicemail. On his phone.

Speaker 1 Yeah, that's, oh my God.

Speaker 3 You don't have to hire a lawyer. You can take it to small claims court.
And they didn't show up, which they're probably not going to do for you either.

Speaker 3 And so I got a default judgment for $2,000 because they violated state and federal law.

Speaker 1 They're unlikely to retain a law firm to fly out to whatever codunk jurisdiction you're in to fight something in court where you have a voicemail with a violation on it. Yeah.

Speaker 1 So did they take the two grand off of the debt that you owed them or how did that work?

Speaker 3 No, because most of the time you haven't even acknowledged that you owe the debt if it's a third-party debt collector as opposed to the original creditor. So they just cut me a check.

Speaker 3 And wouldn't you know it, that was also the last I ever heard about the debt. Yeah.
It's, you know, more benefits to winning a case against against a debt collector.

Speaker 1 Yeah, it sounds like they basically panicked when they found out that you knew your rights and they wiped you off the books, which is pretty smart. Okay, this guy knows his rights.

Speaker 1 He's already got $2,000 of our money. Can we stop pushing this guy's buttons? We have a call roster with 80,000 other people on it.
Just move on.

Speaker 3 Yeah, and that's the thing. Like they have so much more to lose by ducking a court judgment than I do by continuing to not pay a debt.
that had already been charged off and put into collections.

Speaker 3 I mean, they have all kinds of regulations that govern them. Yeah.
You know, so they're just going to pay it.

Speaker 1 So let's get into the nitty-gritty of the Fair Debt Collection Practices Act, the FDCPA. What are they specifically not allowed to do?

Speaker 1 And what can you use against them to turn the tables and get them either leaving you alone or paying you?

Speaker 3 So there are basically four groups of things they can't do. First, there's communication restrictions.
They can't call you between 9 p.m. and 8 a.m.

Speaker 3 That's kind of the inverse of what they can do and when they can call you. Other than that, if you ask them to stop calling you at work, they have to do that.

Speaker 3 If you tell them in writing to stop contacting you, period, they have to do that. If you have a lawyer, they have to communicate with your legal counsel and not with you.

Speaker 1 That actually makes total sense. So if you tell them to stop contacting you, period, how are they supposed to collect the debt then?

Speaker 3 They have to file a lawsuit. That's the only thing they have left in their arsenal.
They're allowed to send you one letter telling you that they won't be contacting you anymore.

Speaker 3 Other than that, yeah, they can sue you. That's it.
Next up are the restrictions on harassment and abuse. They can't swear at you.

Speaker 3 I actually had another case where I got a collection agent to curse at me on a recorded line. You know, easy $1,000 for $2,000 or whatever it was.

Speaker 1 That's interesting. Did you just push his buttons until he cursed at you or was it kind of an accident and you were like, ah, I can turn this into money?

Speaker 3 He was kind of mean from the start.

Speaker 1 Yeah, yeah. That seemed, that makes sense.
So you're like the babe Ruth of suing collection agencies. This is great.

Speaker 3 That's seriously one of the best things anyone has ever called me.

Speaker 1 Yeah, you're welcome. So, okay, harassment means what in this case? Because I'm guessing threats is pretty obvious.

Speaker 1 You already mentioned that they can't just keep calling you over and over, bugging you at work. What else is going to fall under harassment? Because that's always so vague of a definition, right?

Speaker 3 Well, as I just said, like they absolutely cannot curse at you. That counts as harassment.
But other than that, it's like calling you over and over again.

Speaker 3 Beyond that, they have to represent themselves honestly. They can't lie to you about who they are, what you owe, who you originally owed it to.

Speaker 3 They can't falsely claim to be cops or lawyers or government officials of any kind. They can't threaten to have you arrested or anything else that they can't actually do.

Speaker 3 They're not allowed to send you documents that have the appearance of court documents. I don't know specifically what that means because looks like court documents is seems like it's pretty flexible.

Speaker 3 I've gotten stuff in the mail that kind of looked like it was a court document, but I'm sure it was on the right side of the law. And then the last thing is third-party debt disclosures.

Speaker 3 They're only allowed to tell you, your spouse, and your attorney how much you owe.

Speaker 1 I see. Or they're going to owe Nick Pell a thousand bucks.
That makes sense, right?

Speaker 1 Because you don't want them, again, calling your boss and saying, hi, we're a debt collection company and this guy that works for you owes us 10 grand.

Speaker 1 And you're just like, oh, is he going to start embezzling? Cause he's in debt. Why is he in debt? Does he have a drug problem?

Speaker 1 Maybe we should, while he's on probationary period, we should let this guy go. You know, that could cause real damage.
Or and also, how unfair would it be?

Speaker 1 for these guys to call everyone in your family and just start telling them, oh, yeah, he owes five grand. He owes us five grand.
He owes us five grand.

Speaker 1 You don't need to hear this from your your mom, your aunt, your brother, your sister, and your dad. You already know, right?

Speaker 1 And so it sort of stops them from applying pressure in a way that it's just needlessly damaging.

Speaker 3 Yeah, and you can get 2,000 bucks because you're probably also going to get them on the state law. Almost every state has a law that's like a carbon copy of the FTCPA.

Speaker 1 I see. So basically, don't just go after them for the federal violation, go after them for the state violation.

Speaker 1 And I think states like California and New York, and especially New York, they've got really good consumer protection protection laws. So it's often like, yeah, it's $1,000 for the federal violation.

Speaker 1 And in New York, it's $1,500, but it's also 25% interest per week if they don't pay you or like don't show up.

Speaker 1 It's always, New York is always like, we will bend this company over and twist them sideways. if they do this to you, except for landlords.

Speaker 1 Landlords have all the power in New York City, but that's a different issue. So I remember back in the day, man, debt collectors used to be really nasty.

Speaker 1 I've got very limited experience with these guys. I think I was a teenager, but I've had some experience, again, in the distant past where they totally violated pretty much all of these regulations.

Speaker 1 They would start recording the call without permission. They would threaten me.
They would say all kinds of crazy stuff, 2020 hindsight, that makes no sense.

Speaker 1 Like, I'm going to tell your parents and you're going to get in trouble and you're not going to get into college and stuff like that.

Speaker 1 And I'm guessing, I'm going to go ahead and guess that the ship for my case sailed a long time ago since this is like 30 years we're talking about. But are they comparatively well-behaved now?

Speaker 1 Is that kind of the deal?

Speaker 3 Yeah, they are. And the main reason is the Consumer Financial Protection Bureau, which came around in 2006.
Oh, I see. And so now there's a lot more pressure on these companies to play by the rules.

Speaker 3 I mean, I had a guy threaten to come and take my television in like 2002. Wow.
Like he can't do that. So telling me he's going to do that is illegal.

Speaker 3 The other thing is that I think people are just more aware now and it's way easier to monitor your communications. Like You don't even need an app to record phone calls anymore if you have an iPhone.

Speaker 3 It's just baked right into the phone. Right.

Speaker 1 Okay. Yeah.
Cause recording a call in the 90s, you needed some Radio Shack specialized gear. Yeah.
And even then, it was like illegal in most states, right?

Speaker 1 Cause you had to have consent and all that stuff. I love how my phone now tells people when I'm recording them.

Speaker 1 I rarely use this, but I can imagine that when bill collectors hear guys saying they're being recorded, you know, turning the tables on them, it probably makes them really irritated.

Speaker 1 And I'm here for it. So that's the law.
I'm guessing there are gray areas and that's how the system ends up getting abused. I mean, that's kind of always the case.

Speaker 1 It's not the black and white white areas where you see the problems. It's somewhere in the middle where bad actors feel like they can get away with abuse because, oh, this is technically not illegal.

Speaker 1 It's like your brother in the backseat of the car holding his finger in front of your face and telling you, you know, I'm not touching you. You can't get mad.

Speaker 3 Right. So the gray area is definitely what people need to be aware of because this is where you're going to get screwed and be completely out of luck because they follow the law.

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Speaker 1 So legal scams, places where they might know how to stay just on the right side of the law, but what they're doing is definitely shady, even if they're legally covered.

Speaker 1 I can think of it like the court documents thing where you're like, that kind of looks like a court document, but it doesn't have a docket number and it's a slightly different font and the header's different.

Speaker 1 It's like, well, okay.

Speaker 3 Yeah, right. I'm sure that everything I've ever gotten that looks like a court document is legally, legally does not look like a court document.
Right.

Speaker 3 And I think it's fair to call these things legal scams it's certainly deceptive but you know i get why from a legal point of view there's always going to be a gray area you can't draft a law for each and every contingency and at a certain level the onus is on you to be aware and to take care of yourself i don't think it's plausible or desirable to have the state mediating every possible iteration of commerce so what are some of the shady but not totally illegal things that a collection agency might engage in if they're trying to get money out of you i lived off grid for several years and when I moved back on grid, I started getting all kinds of letters from alleged creditors saying that I owed a five-figure debt from 2015.

Speaker 3 And it's like, dude, that's not enforceable literally anywhere.

Speaker 1 So that's the statute of limitations you're talking about? Like they can only collect this debt for so long until it's not legally enforceable in a court of law, I assume.

Speaker 1 So how is it legal for them to try and collect that debt? Doesn't that break the law about misrepresenting themselves or not?

Speaker 3 Ah, see, here's the thing. They do legally own the debt, and they absolutely can try to get you to pay it.

Speaker 3 But if it's past your state's statute of limitations, there's not a federal one as far as I know, the statute of limitations varies from state to state because they have to sue you in a state court to collect.

Speaker 1 Right. Okay.
This sounds a little weird, but as a lawyer, I get it. No court will enforce the debt because it's too old.

Speaker 1 They're still allowed to try to get you to pay it, even though they have no way of actually forcing you to pay in a court of law, which is the most powerful and kind of the only real weapon in their arsenal.

Speaker 1 So what they do is they just try and scare you into doing it or trick you into doing it somehow.

Speaker 3 Yeah, and they're not legally obligated to give you advice, legal advice in any way at all.

Speaker 1 They're not going to say, this is not legally enforceable anywhere, but come on, be a good guy and pay it, right? They're just going to go, you know, you still owe us money.

Speaker 1 You mentioned this is a state thing, so it varies from state to state.

Speaker 3 So the statute of limitations on debt, again, is how long creditors can legally get a court to enforce the debt. They can write as many letters as they want.

Speaker 3 In a lot of cases, they're throwing spaghetti at a a wall and they're hoping that somebody who has no idea what the law is or how credit reports work is going to cough up money for a 15-year-old debt without question.

Speaker 3 Statutes of limitations vary pretty widely. At its lowest, it's three years in North Carolina, Mississippi, South Carolina, and weirdly, Delaware.

Speaker 3 I say weirdly because Delaware is less a state than it is a place where banks have mailing addresses so they can avoid following laws.

Speaker 1 Right. Yeah, everybody's incorporated in Delaware.

Speaker 3 Or imagine being able to be magically whisked away to Delaware. Hi, I mean Delaware.
The longest statutes of limitations are in Rhode Island, Iowa, Kansas, Wyoming, and Ohio.

Speaker 3 So as you might have noticed, there's not a lot of rhyme or reason to this. You don't see higher statutes of limitations in red states versus blue states.
There's not really any kind of pattern to it.

Speaker 3 As far as the types of debt, the ones we're talking about are usually called open accounts or revolving accounts.

Speaker 3 So the statute of limitations isn't necessarily the same for a credit card as it is for a contract loan or other types of debt.

Speaker 1 Right. So you'd have to check on that.
Well, your lawyer would have to tell you, advise you whether you still owe this or not.

Speaker 1 And after that clock runs out, I want to say you don't owe the money anymore, but that's not exactly it, right?

Speaker 3 No, the thing is, and I get the finer points of this are maybe a little hard to wrap one's brain around, but you do legally owe the debt and the courts don't disagree.

Speaker 3 The issue from the perspective of the debt collectors is that there's no legal way to force you to pay it. The courts think the debt is too old, so they're not going to get involved.

Speaker 3 Your credit rating took all the beating it was going to take from non-payment, probably around the time of the charge-off. A charge-off is a huge deal for your credit score.

Speaker 3 And once you get that, it's not really going to get any worse, maybe a little worse, but after two years, it just, it does not make any sense at all to pay these people from the perspective of your credit score.

Speaker 1 Interesting. So when does the clock start? for these?

Speaker 3 It usually begins when you make your last payment.

Speaker 3 So one of the slimy things debt collectors will do is try to get you to make a payment on a debt that isn't legally enforceable, even a token payment.

Speaker 3 So say you owe $5,000 and they're trying to get the whole thing and they can't. So they keep negotiating down and you're just sick of talking to them.
So you go, hey, I'll give you 50 bucks.

Speaker 3 Shut up and go away. But you just made a huge mistake.
You restarted the clock.

Speaker 3 The clock is now at zero again. So what might not have been a legally enforceable debt is now legally enforceable for the full period all over again.

Speaker 1 So you give them 50 bucks and they're like, great. And now we can sue you.
And the clock has started at zero. Yikes.

Speaker 1 So you're saying it's totally legal for them to try to get you to pay something that as far as the courts are concerned, you don't owe anymore.

Speaker 1 And if they can somehow get you to do this, then you owe the original amount plus interest potentially all over again.

Speaker 1 And then you have to wait another three to 10 years for it to go back to legally unenforceable territory. Wow.
So you're just saying stop paying all your bills.

Speaker 1 That's a takeaway from Nick Pell in this episode.

Speaker 3 I think there's lots of legal and moral reasons to pay off old debts. And hey, let your conscience and your legal counsel be your guide here.

Speaker 3 But from the perspective of your credit score, paying off a five-year-old debt that's still on your credit report because you think it's instantly going to give you a 750, this is not going to happen.

Speaker 3 It's going to do little to nothing. But this is one of the ways they get people to make a payment.
So say you live in a state where the statute of limitations is less than three years.

Speaker 3 The typical timeline for something falling off your credit report, seven years. Like you live in Mississippi, the statute of limitations is three years.

Speaker 3 After three years, your credit is as wrecked as it's going to be. There is just zero upside to paying this off to improve your credit.

Speaker 3 And there's zero legal means by which the collection agency can force you to pay. So why pay it?

Speaker 1 I'm guessing that the collection agencies don't give you this kind of sound legal and financial advice when they're calling you up trying to get their money.

Speaker 1 And again, this is not legal advice from us, but I'm saying these collections agencies, they're not going to give you any kind of legal or financial advice when they're calling you up trying to get money from you.

Speaker 3 Yeah, they're not going to do that. So again, to kind of like recap, they legally own the debt.

Speaker 3 So there's nothing illegal about them trying to collect it unless they're misrepresenting by saying they're going to take, like if they say they're going to take you to court, that's a misrepresentation.

Speaker 3 If they say they're going to get a judgment, have your wages garnished. They're not doing anything illegal by telling you that you owe them money and they want you to pay it.
That's not illegal.

Speaker 1 I see. And again, if you pay them anything, you owe the full amount all over again.
The clock starts at zero.

Speaker 3 The full amount plus whatever interest penalties and charges are legal in your state.

Speaker 1 What else are they doing that falls into this legal gray area where what they're doing is totally legal, but maybe just a little bit shady or deceptive?

Speaker 3 The other main thing is offering to settle and then pretending like they didn't agree to settle.

Speaker 1 How can that work?

Speaker 3 So say you get a call from a collection agency, you owe $5,000, but they say, hey, we'll settle it for 500 bucks if you pay it today.

Speaker 3 Makes a lot of sense from their perspective, especially if they only paid 50 bucks for the dead. So you give them your credit card number.

Speaker 3 And seriously, if if you're like half listening to this, listen to this thing. This is the only takeaway that you have.

Speaker 3 Absolutely, positively never under any circumstances give your credit card number to a third-party collection agency for reasons that are about to be made extremely clear.

Speaker 3 They might take your $500 payment and next month you get a charge for $4,500,

Speaker 3 which is the balance of what you owed them.

Speaker 1 How can they do that?

Speaker 3 Well, they do it.

Speaker 1 I see.

Speaker 3 Because you weren't recording the call and you didn't get the agreement in writing. And they're going to say that you agreed to pay off the rest later.
This is an extreme example.

Speaker 3 They're more likely to just start taking $500 payments every month until the whole thing is paid off. But yeah, they do this.
And is it against the law? Is it not against the law?

Speaker 3 They get away with it.

Speaker 1 Yeah, as an attorney, but not your attorney, I want everyone to understand that you should always get any sort of financial agreement in writing for precisely this reason.

Speaker 1 And technically to run a payment you didn't agree to, that is against the law, but you're just not going to be able to prove that you didn't agree to it. So it's a moot point, right?

Speaker 1 And you might even be able to dispute it.

Speaker 3 Yeah, they're going to say that the first payment was agreement to subsequent payment. Exactly.

Speaker 3 And there's the thing is they may even say that on the phone in this like, oh, by the way, we're going to be, you know, like talking like the micro machine man.

Speaker 1 Nice.

Speaker 3 To shoehorn it into the call on their recorded line. They may even say that, but you're definitely not agreeing to that, you know?

Speaker 1 Yeah, that makes sense. Right.
They're going to do, I just need to read you this disclosure. And it's like super, super fast.
You're not listening. Right.

Speaker 1 And it's like, we're going to charge you every month. But what happens if you go, hey, I want this in writing? Are they going to actually do that or what?

Speaker 3 They generally don't want to give you any kind of agreement in writing. So if you start asking for one, expect them to change the subject, stonewall you, and do basically anything.

Speaker 3 but agree to the terms in writing.

Speaker 1 So there are many things you can do to debt collectors that they do every day.

Speaker 3 But they get really upset when you turn the tables. They're actually pretty thin-skinned.
Yeah.

Speaker 1 Well, I'm assuming there are some people like you who just enjoy getting a rise out of collection agents and then goading them into violating the law.

Speaker 1 But I think there are probably way more people who are legitimately behind on their bills and they want to know what they should do.

Speaker 3 So not legal advice, but if something has gone to charge off and it's below a certain amount, I would do absolutely nothing.

Speaker 1 So you've done this a few times then.

Speaker 3 I have. And like, this is the thing is like I pay my bills on time now.
The degenerate days are behind me, but like we'll get into the details in a minute.

Speaker 3 Something with a charge off for 600 bucks, like pay it if you feel morally obligated to, but they're not taking you to court over 500 bucks.

Speaker 3 So I'm not saying like charge up your credit cards and walk away from them.

Speaker 3 There's a difference between ruining your credit on purpose by not paying your debts and just walking away from a charged off debt that's so small. You're not going to get sued for it.

Speaker 3 You are not going to get garnished for it. I know somebody who got like a charge off for like 30 bucks.
They're not taking you to court for that.

Speaker 1 What about the upside of not getting dragged into court and having your wages garnished?

Speaker 3 That's the thing. They're probably not going to sue you.
I mean, I've owed a lot of money to creditors.

Speaker 1 Can I ask, what do you mean by a lot?

Speaker 3 I think the most I ever owed a single creditor was like $8,000, which that I was convinced I was going to get dragged into court over, but I didn't. Wow.
Okay.

Speaker 1 That is, you know, objectively a lot of money. Why would they not come after you for that?

Speaker 3 Well, you're a lawyer. You know the cost of initiating legal proceedings.
There's all kinds of ducks they're going to have to have in a row before they even think about taking you to court.

Speaker 3 That costs money. Then they have to hire a lawyer to at least have a name to put to the case.
They need to hire a paralegal to get all the paperwork for court together.

Speaker 3 They have to serve you with papers. That's all going to cost them between 200 and 600 bucks, which isn't a lot.
But remember, maybe they paid 80 bucks for my $8,000 debt.

Speaker 1 But they're going to get it all back if they sue you because you owe them money and they're going to win unless you're, you know, dead broke.

Speaker 3 Maybe they're going to win. But they actually have to prove that the debt is legitimate and that they own it.
And that's actually not as easy as

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Speaker 1 it seems like a slam dunk. I mean, you spent the money, it's all in your credit card bills, they bought the debt.
Isn't that a pretty clear chain of evidence here?

Speaker 3 You're assuming that they're actually good at record keeping, which is in a lot of cases they're not. I see.

Speaker 3 You may not even be dealing with the initial third-party collection agency because the first one that bought it from the credit card company tries to collect it for a few months, decides it's not worth their time, money, and effort, and they sell it to somebody else.

Speaker 3 That company does the same thing after a few months. They're just like, ah, this isn't worth it.
They sell it to a third company.

Speaker 3 And the third company is the one who decides they're going to take you to court.

Speaker 3 So now you're talking about validating a whole chain of ownership of your debt that passes through four different companies.

Speaker 1 But again, in the age of computers, is that not super easy to do? I mean, I can imagine back in 1978 or something that paperwork got lost all the freaking time.

Speaker 1 But how often does that even happen now? Come on.

Speaker 3 It's a database.

Speaker 3 So literally the first thing you should do if you're dealing with one of these companies breathing down your neck, threatening to take you to court or whatever, is tell them you want to validate the debt.

Speaker 3 Because up to a third of the time, depending on how many places have owned the debt, they cannot validate the debt.

Speaker 1 I'm guessing that you have to file paperwork somehow to get the debt validated.

Speaker 1 Like you can't just ask the kid who's working a summer job who's calling you to pay the money and he goes, oh, I'll do that right now.

Speaker 3 You have to write them, you know, in pen and paper or printer and paper or whatever.

Speaker 3 You have to submit a written request for debt validation you need to send that letter registered mailed with return receipt requested because there's a good chance they're going to claim they never got it okay now the cool thing is that once you ask them to validate the debt they have to cease all contact with you until they can validate the debt so if they can't you're never going to hear from them again and if they do validate the debt well then you've just done most of the work involved in them winning a lawsuit against you okay so this is a bit of a risky gambit from the sound of it and yet you're saying their whole business model is built on the assumption that most people won't push back at all, and it's a volume game.

Speaker 1 So if you become one of the few people who actually asserts their rights and says, hey, validate this, suddenly you might not even be worth their time.

Speaker 1 Because if they paid 25 bucks for your $2,500 debt, they might say, going to request the records for this isn't worth your time. Just move it, scratch it off.

Speaker 1 Is that kind of what we're to understand here?

Speaker 3 Yeah. So according to statistics from the Consumer Financial Protection Bureau, third-party debt collection agencies are unable or unwilling to validate the debt in 43% of cases.

Speaker 3 So a lot of times, yeah, they just, they don't even bother trying because it's a pain.

Speaker 3 There's no shortage of people coughing up money on the basis of a phone call because they don't know their rights.

Speaker 3 And their business model is not built around collecting every last penny they're entitled to. Their business model is built around getting people to pay quickly and without issue.
And they know.

Speaker 3 that if you're asking for debt validation, you're already more trouble than 90% of the people they're dealing with.

Speaker 1 So the point here isn't necessarily to win your case in court. The point here is to just be enough of a thorn in their side that they think, hey, this guy's a pain.

Speaker 1 Let's go collect money from somebody else.

Speaker 3 Correct. And there are a lot of ways to do that without requesting debt validation and specifically giving them the ammunition they need to win against you in court.

Speaker 1 Okay, so if you don't think you really owe the money, ask them to validate the debt and they won't be able to.

Speaker 1 However, if you do owe the debt, and ask them to validate it, they still won't be able to or willing to do it about 43% of the time.

Speaker 1 But if you do owe them and they can validate it, then they have just assembled the proof that they need to win in court.

Speaker 1 And then it's just a matter of whether or not the cost of going to court is justified for them. Does that about sum it up?

Speaker 3 Yeah, but anecdotally, I've had debt validated by a collection agency and they still didn't sue me.

Speaker 1 Right. It probably just wasn't worth them getting a lawyer to your jurisdiction and dealing with that.
So what are some of the pro tips from your experience when dealing with collection agencies?

Speaker 3 The main thing is just don't talk to collection agencies.

Speaker 3 I mean, it's fun to get clever, ask them for their name, name, their full name, the full name and address of the company that they work for, who the original creditor was.

Speaker 3 They're legally obligated to answer all of these questions. They have to answer how much you owe, how much of it is principal, how much of it is interest and fees, what it was for.

Speaker 3 Chances are good, they're going to try and be vague to you when they answer all this. But once you ask, they have to answer you in writing within five days.

Speaker 3 Really hate answering questions of any kind. It throws them off.
They're following the script and you're deviating from it. And this is usually when they start getting irritated with you.

Speaker 3 And, you know, I would record the call if you're going to do this.

Speaker 1 But your advice is to not speak to them.

Speaker 3 Right. There's just no upside in it.
It's the cell phone era. Who's answering weird phone calls from numbers they don't recognize? Yeah, that's true.

Speaker 3 If you're getting hassled by a debt collector, the best thing to do is ignore them until they start threatening to sue. Then ask them to validate the debt.

Speaker 3 If they successfully do that, start negotiating with them. They're going to be far more open to a lump sum payment that pays the whole thing off.

Speaker 3 And remember, they pay pennies on the dollar for your debt.

Speaker 3 So you're negotiating from a position of strength because they absolutely want to take care of this as quickly, quietly, and easily as possible.

Speaker 1 Okay. So I'm sure a lot of people have seen debt relief services advertised around, maybe on TV during the day, right?

Speaker 1 I mean, they're promising to get you out of debt for a fraction of the cost, but clearly, if it were that simple, people could just run up their debt.

Speaker 1 and then go running to one of these companies and pay it off for 10% of the actual cost, right?

Speaker 3 One thing I should say that's relevant here is that when I walked away, and by the way, this was like a decade ago. I pay my bills on time like a normal perspective.

Speaker 3 When I walked away from that debt, I just did not care about my credit score. If you want to buy a house and a car easily, live a functional life in modern society, you need to pay your bills on time.

Speaker 3 You want to rent a car, you want to rent an apartment, your credit score matters.

Speaker 1 On that, we can agree. So that's one reason why people wouldn't just want to run their debt up and go running to a debt relief agency.
But are those companies legit?

Speaker 1 Do they even do the thing that they claim to do? Because people get vulnerable. They're scared.
They're in over their head and they're looking for a lifeline.

Speaker 1 But desperation makes you real easy to exploit, which is why due diligence is non-negotiable.

Speaker 3 There are basically three different kinds of companies that advertise themselves as being able to get you out of debt quickly. Two of them are very much not legit.

Speaker 3 One of them is probably legit, but you need to look into it a little deeper. For-profit companies are the first shady option.

Speaker 3 They run a kind of gambit where you stop paying your bills and start paying their company instead.

Speaker 1 I see. What do they tell people that that's going to do for them?

Speaker 3 Basically, the idea is that you pay them until they have enough saved up in escrow in big giant screaming neon air quotes.

Speaker 3 And once they have enough money in your account with them, they reach out on your behalf and start negotiating.

Speaker 1 What happens while you're paying them? I mean, do the debt collectors stop calling you?

Speaker 3 Precisely nothing happens that wouldn't happen otherwise. In fact, you might get sued while you're building up your negotiation nest tag.

Speaker 1 So this is, wow, that's a complete and total waste of money. And if you get sued, I'm going to go ahead and guess the credit relief agency doesn't go, oh, man, sorry, dude.
Here's all your money back.

Speaker 1 I hope everything goes well for you in court.

Speaker 3 Of course they don't. It's not a savings account.
The next version of shady companies are those who do absolutely nothing but act as lead magnets.

Speaker 3 For those of you who aren't in the marketing biz, they're just collecting information to sell to telemarketers or whoever else.

Speaker 1 What about the legitimate version of debt relief companies, if that even exists?

Speaker 3 Legitimate companies companies are almost universally nonprofits. That doesn't mean they don't make any money off of getting you out of debt.
They do.

Speaker 3 But because they're non-profit, there are stricter rules that mean they have to provide actual services to you.

Speaker 3 So the deal with these companies is the first thing they do is sit down with you and figure out why you got it over your head. They look at your bills.
They look at your bank records.

Speaker 3 They help you come up with a budget that you can live on.

Speaker 3 That probably includes helping you figure out how you're going to be able to make monthly payments that don't just keep you treading water with your credit card bills.

Speaker 3 They want you to actually start reducing your debt. Then they bundle all your debt together, negotiate with your creditors to reduce the principal or the interest.

Speaker 3 Then you pay them monthly instead of your creditors, but they're dispersing the money. They're not just holding onto it and hoping they can negotiate something for you later.

Speaker 1 How successful are they at helping people get out of debt, though?

Speaker 3 Somewhere between 50 and 70% of the people who work with them get out of debt. It usually takes three to five years.
They're actually really good at getting interest rates reduced.

Speaker 3 I think most importantly, they're not offering quick magical fixes. They're offering a way to get your life back on track by playing by the rules.

Speaker 3 If you're committed to getting out of debt and you have stable income and discipline, that's very important. They can help you get out of debt without declaring bankruptcy.

Speaker 1 Huh, okay. I would think that's probably the plan for people to follow if they're trying to get out of debt rather than just putting your head in the sand and rolling the dice.

Speaker 3 I mean, like I said, if you're behind on your bills to the point of charge off, the damage to your credit has basically been done.

Speaker 3 Most of the debt relief agencies are not going to negotiate lower rates with credit card companies. I think that's probably nigh impossible.

Speaker 3 They're going to do it with the collection agencies where it's a lot easier. I think it's all down to the individual situation.

Speaker 3 If you're getting threatened with a lawsuit and getting absolutely nowhere with negotiations, go ahead and reach out to one of these companies.

Speaker 3 But in my experience, simply being the one in 10 people who don't just pay up is enough to get them off your back.

Speaker 1 Well, as not your attorney or anyone's, I'd advise everyone to play by the rules and pay their bills. If that means going to a nonprofit for help, do that.

Speaker 1 The main thing I want people to take away from this is that you have rights when it comes to dealing with third-party debt collection agencies.

Speaker 1 So if one of these companies is violating the law when they talk to you, you should report them, whether you hope to get a thousand bucks out of it or not.

Speaker 1 And I think Nick is totally right about not talking to these people. It's like trying to argue with a lawyer.
Third-party collection agencies do this for a living and you don't.

Speaker 1 So if you get caught caught on the phone with them, your best bet is to hang up that phone, block their number, tell them to validate the debt in writing and wait until they've actually proven that they own the debt they are trying to collect.

Speaker 1 And if it's outside the statute of limitations in your state, you might be off the hook. If they can't validate it, don't pay it.

Speaker 1 If they validate the debt successfully, then it's probably time to start looking into one of those nonprofits to help you get out of debt the right way.

Speaker 1 Check out the show notes for links to those if you're interested. And of course, you need to get your own lawyer if you are in trouble with debt or legal trouble of any kind.

Speaker 1 I am a lawyer, but not your lawyer. Thanks as always to Nick Pell for helping us settle accounts here.
And thank you for listening.

Speaker 1 Topic suggestions for future episodes of Skeptical Sunday to Jordan at jordanharbinger.com. Advertisers, deals, discounts, and ways to support the show, all at jordanharbinger.com slash deals.

Speaker 1 I'm at JordanHarbinger on Twitter and Instagram. You can also connect with me on LinkedIn.
And this show, it's created in association with Podcast One.

Speaker 1 My team is Jen Harbinger, Jace Sanderson, Tata Sedlowskis, Robert Fogarty, Ian Baird, and Gabriel Mizrahi. Our advice and opinions are our own.
I'm a lawyer, but not your lawyer.

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Share the show with those you love.

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Speaker 1 Imagine a world where money, religion, and nations are shifting under the rise of AI capable of making decisions beyond human control.

Speaker 12 Humans are very good in solving problems, but they often focus on the wrong problems.

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