Who do you pay when a debt goes into collection?

Opening Credits columnist Eric 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,
My wife and I, like so many others, have been trying to get above water financially for the past few years. I'm nearing 60 and a U.S. Air Force disabled veteran. A credit card that we had, in my wife's name, was to Lowe's Consumer, and we closed it back in mid-2010. The original debt was $6,300, but with interest in 2010 the debt became $9,199. They charged it off. We then began getting a total of 26 documented phone calls in three months from a collection agency named Bay Area Credit showing the creditor to be GE Consumer Finance. Then after a couple of months, I began documenting the 229 phone calls from the next collection agency, ERC, between May and Dec. 7, 2011, showing the creditor as General Electric Capital Corp. That collector stopped calling us on Dec. 8, saying they've sent it back to the creditor at General Electric Capital Corp. We have very little money to negotiate with, but we're willing to attempt it. Which one of these creditors should we contact? Thanks. -- Art 

Answer for the CreditCards.com expert Dear Art,
Lowe's credit card business is owned and operated by a third party -- GE Capital. So what you have is an unpaid debt that was sold to a collection agency. After they could not get you to pay up, they let another company give it a go. It's common for collectors to purchase and then sell such accounts, but atypical for one of the original companies to try again. Evidently it happens, though.

Still, who is in current possession of your account matters a lot less than other factors when it comes to dealing with delinquent debt. Of critical significance:

Charge-off date and the statute of limitations. Because you and your wife didn't pay the Lowe's consumer credit card bill, it's no wonder they eventually wiped it from their books. Nor is it a mystery why the amount owed swelled by a few thousand dollars. Punitive interest rates will do that, since the finance charges build quickly. The charge-off date is important, though, as it's when you start to count the years left where you can be sued for the debt. That time frame is called the statute of limitations, which varies by state. For example, in California, a creditor has four years from the charge-off date to take a delinquent borrower to court.

Because the debt is still young, you can be sued for the debt no matter where you live. If they don't take that action eventually, though, you'll be safe after the statute of limitations is up.

Fair Debt Collections Practices Act. Oh, FDCPA, how do I love thee? You are a powerful, wonderful federal law that prohibits abuse heaped on troubled borrowers ... OK, I got carried away there, but this law really is a great one. Third-party collectors are strictly regulated in the way they behave. While they are allowed to do lots of things to get you to repay (like speak in a really mean voice), they can't call you repeatedly. That is usually interpreted as more than once a day.

However, I did the math and it appears that the original collector may not have overstepped those legal parameters. You say they called 26 times in three months. That's less than the 90 times (if they were to call once per day) that they are permitted. The next creditor did seem to keep the phone ringing, but he, too, might have been operating legally: May through December is seven months, or about 240 days. You reported 229 calls. Oh, and yes, they are allowed to call on Sundays and holidays.

How you're going to deal with the bill. Now that you know your rights, work within them to rectify the problem. Contact the last collector to hold the debt and ask if he would accept partial payments of what you can afford until the account is paid in full. You may also try to settle for less than the total balance, but don't count on acceptance. They're under no obligation to settle. What they do want is the money, so if you start to send some, they should calm down and stop contacting you.

If the collector does settle for less than the amount owed, you and your wife will most likely be liable for paying taxes on the amount forgiven. Read our article, "1099-C surprise: IRS tax follows canceled debt."

My only concern is that the amount you send will be so small that they will get fed up and take you to court anyway. It can happen. Still, you may be protected if you have no assets to levy or wage to garnish. In that case, a judgment would be for naught. Therefore, if it ever gets to the point where the collector makes lawsuit sounds, and if you have nothing for them to take, point that out.

I wish you the best of luck -- and thank you for your service to America.

See related: How wage garnishment works and how to avoid it, How charge-offs work, how they affect your credit

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Updated: 01-23-2018