Collection law firms: Things could be about to get real

So you’ve received a notice from a collection law firm that it has been assigned your account. This no doubt feels like a serious matter, and, honestly, it is. But you are not powerless — you still have ways to reduce your risk of being sued. You can also use this as the opportunity to face your debt and resolve it.

Why is my debt with a collection law firm?

Once your account is six months past due, you are at increased risk of being sued. In some cases, and with particular lenders, your original creditor may assign your account to a collection law firm to pursue a potential suit. And it is increasingly more common that your debt is first sold to a debt buyer for a percentage of its value. In fact, your debt may be bought and sold several times, each time for a lower price. At any point in the chain, a debt buyer can decide to work with a collection law firm to seek payment from you and possibly sue you.

Related article: Help, I’ve been sued by a debt collector!

Once your debt is assigned to a collection law firm, you will typically receive a letter requesting payment of your debt. You have not been sued — yet. Generally, you are given 30 days to respond and dispute the debt or point out inaccuracies.

This letter is a red flag, particularly if the law firm’s address is in your state. In all likelihood, you are very close to facing a suit, said Michael Bovee, who has worked in debt resolution for more than 20 years and is the co-founder of Resolve. He receives calls almost daily from people who have received notice that they’re being sued over a debt. Even if that initial letter is from an out-of-state firm, don’t ignore it. If that 30- day window passes without a response from you, expect a notice of being sued to quickly follow — often within a couple of weeks.

What do I do when I get notified by a collection law firm?

The most important thing for you to do at this point is to determine how to respond. Often when people are deep in debt and don’t have the money to dig their way out, they ignore the letters and phone calls from their creditors and debt collection agencies. That’s understandable, because it’s a tiring and even scary situation. But ignoring creditor communications can lead to serious consequences, particularly when you are teetering on the edge of a lawsuit.

Bovee said collection law firms win roughly 90% of the suits they file, primarily because consumers don’t respond to defend themselves, which typically ends in a default judgment.  Even if you don’t know what steps to take, you can buy time to figure that out just by responding to the court.

What are my options?

In the past, there was a good chance that whomever bought your debt had limited information or even the wrong information. According to the Federal Trade Commission’s “Structure and Practices of the Debt Buying Industry” report, summarized here by Consumer Reports, debt buyers often don’t receive supporting account documentation, don’t have any guarantee of the debt seller’s accuracy on the information and aren’t informed about whether the consumer previously challenged the debt. In other words, the collection law firm may not have had a solid case if it sued you.

But Office of the Comptroller of the Currency’s (OCC) guidance to banks that sell debt now requires banks to pass detailed account information on to the purchaser. This could mean that if your debt has gone delinquent, and was purchased in the last couple of years, debt buyers are likely now more confident with the collection actions they bring in court.

This is why it’s important to respond. If the debt isn’t yours, has been paid off or there are other inaccuracies in the letter you received, it’s critical that you respond in writing to dispute these things. (You’ll also want to make sure that these inaccuracies are removed from your credit report.)

The Consumer Financial Protection Bureau provides guidance for responding to incorrect information. You can use a template from this webpage if the debt is not yours. If the letter you received contains misinformation about your debt, you can modify the response letter template that the CFPB provides to draft your response. You also have a right to request the original creditor documents that back up the information in the letter.

If the information in the letter is correct and this is your debt, you still have the following options.

Dispute the request for repayment

You may dispute the request for repayment because a standard legal defense applies to your case, such as the statute of limitations has passed or the creditor or debt buyer doesn’t have the required paperwork. This is a good time to talk to a lawyer. Many offer free consultations, and you can find attorney referrals through the National Association of Consumer Advocates (NACA).

Related article: Is your debt time-barred? A state-by-state guide to debt statutes of limitations

Negotiate a settlement with the collection law firm

If you can pay a portion of the debt or make monthly installments, you can call the collection law firm to discuss this. These firms often work on contingency, meaning they earn a percentage of what they get you to pay. So they want you to pay. At this point, you probably can’t negotiate to pay less than 50% of what you owe — and it might be closer to 80%, Bovee said. You can chat for free with a Resolve debt expert about this option.

Related article: How to settle with a debt collector

File for bankruptcy

If you don’t have the resources to pay a settlement or set up a monthly payment plan, consider filing for bankruptcy. Because bankruptcy carries a stigma, many people avoid it. However, because it stops all litigation, including lawsuits, it can be the best step toward financial freedom. “As soon as you file bankruptcy, you are protected [by the courts]. So there’s an emotional benefit to bankruptcy that you don’t necessarily get from the other debt relief,” said Robert Haupt, a bankruptcy attorney with Lathrop Gage LLP.

Wait on the lawsuit

You may choose to not respond to the letter but rather wait to be served the papers for the lawsuit. (But be sure to respond to that!) Your reason to wait may be one of many:

• You’re not ready to settle. If you need time to save or borrow money for a settlement, you may decide to ignore the letter and wait for the notice of a lawsuit. You can still negotiate a settlement with the collection law firm once you receive this notice. It’s wise to consult with a lawyer on the best way to manage this and respond to the court documents.
• You don’t like the options of settling or filing bankruptcy and are willing to defend yourself against a lawsuit with the hope that the collection law firm does not have the documentation to support its case or won’t take time to build a strong case against you.
• You only have income from exempt sources so there is nothing for the creditor or debt buyer to take if it wins a lawsuit. Some examples of exempt sources include Social Security benefits, veterans benefits, public assistance, unemployment insurance and child support.
• You intend to countersue because you believe the debt collector violated the Fair Debt Collection Practices Act. Keep in mind that debt collector violations do not absolve you of your debt. Speak to an attorney for guidance.

What are my next steps?

Whichever path you choose, NACA recommends that you take action, read every document you receive and attend your court dates.

“Be an active participant in your own solution,” said Bovee, stressing that there is always a solution to keep things from getting worse as well as plenty of free trustworthy resources to help you evaluate your next steps.

If you want to access legal counsel, the CFPB offers guidance on its website. NACA’s website provides resources and access to its members’ database.