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How to handle unethical debt collectors

By

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
I have a student loan in default. The debt collector would not accept my offer of payment and forced me into a $700 payment. They would not send me anything in writing and threatened garnishment. They are now issuing a check each month and forcing me to pay. What can I do? -- Tyler

Answer for the CreditCards.com expert Dear Tyler,
You may be surprised to learn that I was once in a very similar position. During my junior year of college, I transferred schools, but neglected to notify my student loan holder. They presumed I had dropped out, and after the grace period ended, they tried but failed to locate me. Eventually, that loan ended up in a collection agency, and my nightmare began.

A "Mr. Hipple" found me and called day and night, threatening lawsuits, jail and bodily harm unless I paid the entire $8,000 balance immediately. He'd leave long, ominous messages on my answering machine: "Erica, I know you're there. Pick up the phone, ya deadbeat." Utterly terrified, I got two jobs in addition to my classes and paid the thing off in just over a year.

So, yes, I know what you're going through. It wasn't until years later that I found out the collector broke quite a few laws. According to the Fair Debt Collection Practices Act, third-party collectors are prohibited from saying they are going to sue, unless that's really their next step. They also aren't allowed to harass you, call repeatedly and at odd hours, leave detailed messages about a debt or lie about what they can do. (For example, you can't be imprisoned for student loan debt, and they can't rough you up!)  

It sounds like the collection agency that's handling your case may also be breaking the law. You see, they are required to send you a written statement about your balance. As far as wage garnishment, though, you need to take that possibility seriously. As per the Debt Collection Improvement Act, collectors may seize up to 15 percent of a defaulted student loan borrower's paycheck -- without winning a lawsuit and getting a court order.

Happily, you have some recourse that can turn your misery around. The Higher Education Act gives student loan borrowers a one-time only chance to cure defaulted loans by setting up a "reasonable and affordable" payment plan.

By making nine consecutive on-time payments, you'll kick that loan out of default. Even better, you are the one who decides how much to send, not the collector. If $700 isn't doable, maybe $300 is. To know what makes sense, develop a budget. Then contact the collector and tell them you will be exercising your legal right to rehabilitate your loan via the reasonable and affordable plan. Finally, begin to pay.

Can they balk? Sure, and they can ask for documentation, too. But ultimately, you are the one who determines what's affordable. When you've completed the plan, the default notation will be removed from your credit report. At that point, the remaining balance will be resold to a lender who will put you on a 10-year payment plan, and you'll be eligible for other more flexible payment arrangements.

If this sounds like the miracle you've been hoping for, you may be right. In fact, had I known about this option when I was hanging with Mr. Hipple, I surely would have been all over it. Still, there was a huge benefit in not dragging the debt out. While I nearly killed myself in the time it took to repay what I owed, it was over relatively quickly. The relief was heavenly.

Therefore, Tyler, I urge you to stretch yourself, work hard and pay as much as possible. Don't underestimate your ability. Though student loan interest rates tend to be low, if you extend it for many years, you'll be paying massive amounts of money in finance charges.

See related: Develop a budget in 3 easy steps, Cure your defaulted student loan in six steps, Rebuild your credit after wage garnishment, Ignoring debt can lead to wage garnishment, 5 key federal laws that protect cardholders, 11 tips for dealing with debt collection agencies

Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.

Send your question to Erica.

Published: January 19, 2011



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