9/24/2012 7:20 PM ET|
When debt collectors break the rules
Some collectors don't play by the rules, and their threats can sound scary. You can protect yourself -- if you know your rights.
Getting a call from a debt collector is never pleasant. But one Credit.com reader is getting a double threat. Not only is a collections agency threatening her with a lawsuit, it also plans to sic the Internal Revenue Service on Shannon's disabled, 84-year-old mother.
"He is threatening to file a 1099-C and said the IRS will be suing my mother," a reader using the screen name "Sarah Shannon" wrote in a comment to the Credit.com blog recently.
For those not familiar, the 1099-C is an IRS tax form. It is used when lenders forgive or discharge debts, because the IRS treats such forgiveness as bonus income and taxes the forgiven principal accordingly. Any surprise tax bill would pose a big problem for Shannon's mother, who "doesn't even file taxes due to the amount she receives from Social Security," Shannon writes.
But certain details about the debt make the collector's threats appear questionable. First, Shannon writes that the debt, incurred on a Bank of America credit card, was discharged in 2004. That's a long time ago. Depending on the state where Shannon's mother lives, the statute of limitations on the debt has almost certainly expired, says Gerri Detweiler, Credit.com's consumer credit expert.
Which means the collector, an attorney, may not have the right to collect the debt in the first place.
"The statute of limitations for most consumer debts runs between four and six years," Detweiler says. "After that time, debt collectors in most states can't successfully sue to collect the debt. In some states, they can't even try to collect it."
The second questionable practice involves the threat to get the IRS involved. According to IRS rules, lenders and debt collectors must file a 1099-C within three years of a debt being forgiven, Detweiler says.
In this case, the collections agent missed the deadline by five years.
"There's a good chance this collection agency is pushing the envelope here," says Detweiler. "It sounds to me like this law firm could be making illegal threats."
Years ago, debt collectors rarely threatened to file 1099-Cs. Then the foreclosure crisis hit. Now that more than 1 million homes are caught somewhere in the foreclosure process, according to RealtyTrac, many Americans have become familiar with the once-obscure form, as they come to face with whopping tax bills on forgiven mortgage debt.
The tax form makes the perfect cudgel because it is so notoriously complex, Detweiler says, and because it carries the power of the IRS. But at least in Shannon's case, the threat appears to be empty.
"The 1099-C seems to be the threat du jour right now," Detweiler says. "Maybe they can't threaten to sue, but they use this because it's a cloudy thing to bully people into paying old debts that may no longer be collectible."
In the end, Shannon's question is simple: "Is this something I need to worry about?"
- Calculator: Should you make extra debt payments?
Detweiler's answer: Probably not. Here are some steps that Shannon can take to protect herself just in case, and hopefully make this aggressive debt collector go away.
1. Get it in writing
Under the Fair Debt Collection Practices Act, Shannon has the right to request documentation of any debt. She should demand it on paper, not by email. If the attorney in this case knows he is breaking the law by threatening IRS action, forcing him to put it in writing may be enough to stop the phone calls.
2. Families don't count
Unless Shannon was a co-signer on her mother's credit card, the debt collector is barred by law from discussing her mother's debt with her. And once the collector makes contact with Shannon's mom, all contact with Shannon must stop.
3. Learn your rights
For more in-depth information about how to protect yourself from overzealous debt collectors, see Credit.com's detailed summary of consumer rights.
4. Report them
If the calls don't stop, Shannon can report the collector to the Consumer Financial Protection Bureau, her state's attorney general's office and the Better Business Bureau. Sometimes even making the threat to report calls to the authorities is enough to make them stop.
More from Credit.com:
- How do debt relief options affect your credit?
- How to deal with summer travel debt
- 7 ways to defend yourself against a debt collection lawsuit
VIDEO ON MSN MONEY
The article writter is wrong when stating "the statute of limitations on the debt has almost certainly expired. Which means the collector, or an attorney may not have the right to collect the debt in the first place"
The statute of Limitations can stop the debt collectors and attorneys from taking legal actions against you. But, it doesn't stop them from legally still posting the debts on your credit reports, or attempting to collect the debts.
So, as usuall these articles are misleading and full of bad advice. Trying to dodge debts by letting the statute of limitations run out isn't a good plan..............ever single day people are filing bankruptcy to clear 10 year old debts that have been re-aged and still on credit reports hauting people for many, many years.
You can run from your past but it's never far behind.............and I wish these silly half-witt college educated twits writting these financial articles had a clue what they were writing about, or get half of their facts straight.............
What most of you forget and many of you counselors posting here is you all believe you know the laws. But you need to read the FCRA, FACTA closer and understand how these debts are re posted, re aged and still active. Most of you rely on your company memos for education instead of reading the Acts yourself.
Every single day thousands file BK because of debts that are well past the statute of limitations. Debts are very easy to re age and re post and re sell and listed several times on credit reports.
Military service members have old debts they need cleared for a security reasons yet in many cases the only way to get them removed is to negotiate for removal via payment.
You can spout the laws all you want, but what the laws state and what is really happening are two different things.
Debts are re aged, re posted daily. It is legal for debts to be posted that are still owed and it's still legal to attempt to collect debts after the statute of limitations have expired.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.