Representing consumers as litigation defendants and bankruptcy debtors has given me both a unique knowledge base and perspective about it. I often counsel my clients and potential clients that determining whether to litigate a collection lawsuit or file a bankruptcy is partially a function of what your creditors can do to you if you elect to do neither. But whether they try to do anything at all is typically itself a function of how you got to looking for and talking to me in the first place.
Let's say you have a credit card balance that you do not pay. Although my clients often seem to think otherwise, it does not matter why you default. When the expected payment is late or insufficient (that is, less than the "minimum" the creditor requires) they will likely call you to inquire as to why they have not been paid, find out when you are going to pay, make arrangements for you to pay, and otherwise encourage you to pay. Most people, of course, have not paid because they are unable to do so. This explanation is likely to spur the creditor's agents to inquire further along the lines of: "Well, you have been paying us on this account without major incident for some number of months or years. What has changed? Tell me about what is going on in your life." The unfortunate debtor is fooled into believing that the person on the other end of the phone actually cares how they respond; they are wrong. The agent is only asking to determine the soonest possible time that the debtor is likely to be cajoled into paying, making arrangements to pay, etc. Creditors know the effect that always having the same person contact the debtor regarding the account is likely to spur a sort of Stockholm syndrome, in which the debtor will begin to identify with and feel a bond to that person. Guilt is a powerful motivator, especially for the religious.
But let's say that you still do not pay it; again, the reason for not doing so is immaterial. In the United States, something called Regulation Z requires, among other things, that a banking institution cannot carry on its books for more than six months a debt in default. In essence, it requires the creditor to value seriously delinquent accounts at zero (dollars). At that point, the account is worth nothing to the institution, meaning that if they can get anything in exchange for it, then they are "ahead" in some sense.
Many such accounts are packaged and consigned or sold to entities whose sole purpose is to collect those accounts. While a consignment would call for the entity to receive a certain percentage of all amounts collected in the package, a sale would transfer the contractual right to collect the accounts in the package to the purchaser. Debt sales such as these typically call for the purchaser to pay the original creditor one to twenty cents of the face value of the packaged accounts at the time of purchase. These transactions sometimes require the exchange of tens or even hundreds of millions of dollars to consummate. The purchasing entity ("collection agency") then has the right to collect the account in whatever manner it sees fit.
The reality that most people do not wish to accept: Other than bankruptcy, there is no law that requires any creditor to accept even one penny less than what is lawfully (that is, contractually) due upon the account. Creditors and collection agencies have no duty whatsoever to "work with" you.
Yes, there are laws such as the Fair Debt Collection Practices Act ("FDCPA") that prohibit collection agencies from taking certain actions in connection with the collection of these debts. But the truth is that the penalty for violating these statutes is slight. The statutory damage award provided under the FDCPA of $1,000.00 per successful lawsuit (NOT per violation) has not been amended nor otherwise updated to keep up with inflation or any other economic indicator since it became law more than thirty years ago. In comparison to the types and amounts of balances that are being collected, this penalty is a drop in the bucket, and the risk of being sued for $1,000.00 is one that a collection agency working a $10,000.00 debt is all too happy to take.
And if you still do not pay? That is when the collection agency may well hire an attorney to pursue its right to receive involuntary payment by way of a judgment. How they might acquire a judgment varies from state to state, but it always begins by commencing a lawsuit against the debtor.
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