Debt Collection
When buyers miss payments, creditors can choose to accelerate the debt or declare the entire debt in default and then proceed with the remedies under the law or the contract. These remedies differ widely depending on whether the creditor has taken a security interest in the goods that were the subject of the sale or sometimes in other goods as well. Secured Debts A secured debt is a debt where creditors have a security interest -- the right to repossess goods in case the debtor fails to pay on time. Usually the goods that can be repossessed are the goods, which were purchased on credit to create the debt. The UCC permits a secured party to repossess collateral upon a debtor's default. In addition almost all state legislatures have adopted some form of statutory repossession procedures by which personal property may be recovered if unlawfully detained. Retail Installment Sales Acts and Vehicle Installment Sales Acts usually contain some provisions about the repossession of security interests. See Unruh and Rees-Levering Acts, above. When goods have been repossessed, consider these issues: • Is the repossession lawful? • Is there a valid security interest? In order to be valid, a security interest must be in writing and also meet other requirements that vary from state to state. • Did events occur that according to the contract would trigger repossession? Buyers usually fail to make timely payments, although there can be other reasons. The contract will govern when repossession can occur. • If repossession was permissible, was it performed lawfully? Repossession without judicial process is permissible only if done without "breach of the peace." Breach of the peace in most jurisdictions includes: • a physical intrusion into the debtor's house including garage or place of business unless debtor has consented. The street or even a driveway is usually not considered a breach of the peace in and of itself; • lack of consent ─ if the debtors indicate that they do not consent to the repossession, the creditor cannot repossess even if the car is in the driveway or on the street; • other factors -- Some courts hold that trickery may be a breach of the peace. Penalties If the repossession is unlawful, the debtor may be entitled to civil damages, if trespass or battery has occurred. The UCC gives the debtor the right to recover damages to compensate for any loss suffered because of improper repossession. Section 9-507(1) The debtor also may be entitled to recover a penalty equal to the entire finance charge plus 10% of the principal. UCC 9-507(1) Lawful Repossession Once creditors have repossessed, they are entitled in some cases to a deficiency judgment -- the difference between the amount owing on the contract and the value of the property. The UCC provides that creditors cannot sue for deficiencies at all unless they have resold the goods after notice to the debtor in a commercially reasonable manner. (UCC 9-504, 9-505) Creditors must send debtors notice of the circumstances of the sale. The notice must allow the debtor a reasonable time to respond; what is reasonable varies from state to state. Notices can be invalid if they are not sent, do not contain the correct information and are not sent in a timely manner. If creditors receive a fair price for the goods, the sale is commercially reasonable no matter what else may have been unusual about it. Unsecured Debts Creditors know that going to court to collect debts is expensive, time-consuming and often unproductive because many debtors have no assets that can be reached by a judgment. Hence they will refer a debt to collection before filing a court action to try to obtain payment. Referring to collection is often more productive because the collector, who takes a percentage of what is collected, is not a lawyer. Moreover, many debtors do not know that they have so little money that a court could do very little against them even if they were found to owe the money. Thus they are vulnerable to various collection techniques which shame or scare them into paying a larger amount of the debt than a court would order them to pay. Practice Tip: Complaints about wrongful collection are good bargaining chips to avoid suits for deficiencies. Fair Debt Collection Practices Act The federal Fair Debt Collection Practices Act covers persons or organizations that collect debts on behalf of a third party including attorneys who collect debts for the federal government. The Act does not apply to organizations who attempt to collect their own debts, except if they use another name which might indicate that a third person is collecting the debt. Prohibited Practices Time and Frequency of Communications The collector cannot contact consumers or their families in these situations: • Any time and place which is unusual or which the collector should have known to be inconvenient to the consumer. Absent knowledge to the contrary, communication before 8:00 a.m. and after 9:00 p.m. is presumed to be inconvenient. • If the consumer is represented by an attorney whose name and address are ascertainable by the collector • At the consumer's work place, if the collector knows or has reason to know that the employer prohibits such communications • If the debtor has told the creditor to cease communication (some limited exceptions) Third Party Communications • The Act flatly prohibits communications with all third parties in collecting the debt unless the consumer consents, the court orders it or communication is reasonably necessary to effect a post judgment judicial remedy for requiring location information (skip-tracing). In skip tracing, the collector cannot state the consumer owes a debt and cannot with some exceptions communicate more than once. Skip tracing cannot be done at all, if the consumer is represented by an attorney. Consent and Nature of the Communication • Harassment or Abuse Collectors cannot engage in conduct "a natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt." This provision specifically includes threats of violent or criminal means, using obscene or profane language, and publishing lists of alleged debtors, except to a credit reporting bureau. • False or Misleading Representations False, deceptive or misleading representations or means in collecting debts are prohibited. A collection agency must give its true name, although the individual caller can use an alias provided that the same alias is consistently used. (Many states require collection agents to register their aliases with the agency that regulates collection agencies. • Unfair and Unconscionable Practices These provisions can cover a broad range of conduct. Affirmative Rights • Validation The collector must send with the initial communication or within five days thereafter, written notice containing the debt amount, creditor's name and invitation to the debtor to notify the creditor within thirty days if any dispute exists as to the validity of the debt. If the debt's validity is disputed, collection activity must cease until verification of the debt has been mailed to the consumer. • Multiple Debts The consumer may control the way that a payment is applied in the event that the collector is responsible for more than one of the consumer's debts. Specifically, the collector cannot credit a payment to any debt that is disputed and must allow the consumer to select which debts will be paid first. Damages Consumers can sue for actual damages, including loss of employment, physical injury or other immediate harm, mental suffering, inconvenience and harassment. The court can award additional damages of up to $1,000 for each person as well as punitive damages above these amounts, attorney's fees and costs. Collectors can defend by showing that the violation was "not intentional and resulted from a bona-fide error notwithstanding the maintenance of procedures reasonable adapted to avoid such error". State Debt Collection Acts [California Fair Debt Collection Practices Act, Civil Code §§1788 - 1788.32] Many states also have statutes defining prohibited debt collection practices and providing consumers with statutory causes of action against collectors who engage in prohibited conduct. A primary difference is that many states include in-house collectors such as credit departments of large retail merchants that regularly collect store accounts. State acts also can include creditors and their employees who collect their own debts and the banking industry that is exempt for the most part from federal law. If provisions between state and federal laws are inconsistent, provisions most protective of consumers will prevail. Most states also have statutes and regulations that govern the licensing and services of collection agencies. They contain provisions concerning prohibited practices and disciplinary action that can be taken against agencies.	About Consumer Law Governing Laws Unfair and Deceptive Acts & Practices Truth In Lending Retail Installment Sales Acts Home Solicitation Contracts Debt Collection    Secured Debts    Unsecured Debts    Fair Debt Collection Practices Act    State Debt Collection Acts Garnishment