Tuesday, January 3, 2012

What Are Your Odds of Being Sued By a Collection Agency?

Most consumers that pay off debts in collections don't do so out of moral obligation. One of two things drives debtors to pay off collections:

1. The misguided belief that doing so will improve their credit scores (it doesn't).

2. Fear of a lawsuit. 

Paying collection agencies is always, always a gamble. Most people don't have the lump sum the company demands just lying around and must pay off the debt bit by bit. The problem here is that when you submit a payment, you restart the statute of limitations for lawsuits

 You'll need a stack of cash for lump sum payments
I've discussed the statute of limitations in depth in other posts, so I'm not going to rehash it now. The short version is that the statute of limitations in your state dictates how much time bill collectors have to sue you before your debt is "obsolete." It's different in every state.

Note: Don't get the statute of limitations mixed up with the reporting period of a collection agency's tradeline on your credit report. They are two entirely different things.

The Ideal Scenario: When the Collection Agency Doesn't Sue

The ideal situation is for the collection agency to seemingly forget about you and for the statute of limitations to pass. Granted, some particularly shady companies will file lawsuits beyond the statute of limitations. Should that occur, its up to you to notify the court that the lawsuit is out-of-statute. In general, however, once the statute of limitations passes, you're pretty much home free.

But if you make any payments on the debt, you extend the statute of limitations. That means that, should you fall into financial trouble and be unable to make your payment one month, you're even more likely to get slapped with a court summons – because the collection agency knows you have the money and they want it.

It's up to you whether you want to keep your fingers crossed and try to wait out the statute of limitations or pay off the debt bit by bit and hope you don't fall on hard times.

Factors That Increase Your Odds of Being Sued By a Collection Agency

Not all collection agencies sue debtors. Some do, some don't. Of those that do, there is often little rational sense behind these lawsuits. For example, I've seen one particular collection agency (Not naming any names here, but its initials are MCM) sue a debtor over a few hundred dollars while completely ignoring a second debtor who owed thousands. As a rule, however, the following factors increase your odds of being sued by collectors.

1. High Debt

The higher the debt, the more danger you're in. It doesn't matter if your original debt was a measly $50. Interest and fees can cause a debt to balloon exponentially. While this is the very thing that makes it impossible to pay, the fact that you didn't owe very much to start with doesn't help you in the lawsuit department. There is no "line in the sand" that defines safe and not safe amounts of debt but, in general, if you owe more than $1000, you've entered the red zone.

2. The Statute of Limitations is About to Expire

You've waited patiently for years, watching the statute of limitations tick away only to get a court summons a couple of months before you're home free. Cruel? Yes. Common? You bet. Suing you isn't free. Many collection agencies wait until the last minute for you to start making payments voluntarily. When you don't, they'll slap you with a lawsuit right before the statute of limitations expires.

3. The Collection Agency Discovers New Assets

Apply for a mortgage recently? Make the mistake of mentioning to a debt collector that you  had a new job and would pay soon, just to get him off the phone? Did your employer recently update your credit report to reflect your new job? New assets means you're able to pay your debt, and collectors smell money like sharks smell blood. Any information you volunteer or that the collection agency can glean from your credit report could come back to haunt you in the form of a lawsuit.

4. You Sent a Cease and Desist Letter

Everywhere I look online I see Average Joe's telling debtors to send Cease and Desist letters to collection agencies. After all, federal law states that once the collection agency receives a written request to stop contacting you, it must oblige. The downside to this is that if your debt is still within the statute of limitations in your state, sending a cease and desist letter is akin to painting a target on your forehead. Because debt collectors can no longer call you or send you letters, the only option they have left is to sue you – and they will.


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