Collection agency vs. lawsuit

[Sylvestor McBean]

Jurisdiction

Kansas

I've had this question for years, hopefully someone here can help me out with it. Here's a hypothetical scenario to illustrate what I'm asking:

Say you hire a contractor to do some remodeling work in your basement. The contractor does a poor job, or maybe doesn't even do the work at all, but he sends you a final invoice anyway claiming you owe him money. You state that you don't owe him anything since he didn't fulfill his obligations to you, and he threatens to send you to collections. What are the rules governing what debts can and cannot be 'sent to collections'? In this scenario, since there is not agreement on the amount owed, wouldn't he have to take you to small claims court to try and get you to pay up? Does a collections agency have any right to collect on a debt where the debtor disputes the debt?

This question applies to large corporations too. Say Corporation X feels you owe them money, but you feel otherwise. Can they send your account to collections? Don't they have to prove they are actually owed the money before attempting to collect on it?

Final question: If that contractor or Corporation X does decide to take you to small claims court, don't they have to do so in the county where you live?

Thanks for any help you can provide!

 

[Tax Counsel]

I've had this question for years, hopefully someone here can help me out with it. Here's a hypothetical scenario to illustrate what I'm asking:

What are the rules governing what debts can and cannot be 'sent to collections'?

The contractor can send any debt he thinks is owed him to a collection agency. Collectors have no more power to collect than the contractor does — they can call and send letters to hound you to pay. That's it.

Does a collections agency have any right to collect on a debt where the debtor disputes the debt?

You have the right to tell the debt collector in writing not to further contact you about the debt. Under the federal Fair Debt Collection Practices Act (FDCPA) once you do that the collector must cease most communications with you about the debt. The creditor or the collector may still sue you for a judgment on the debt, however. You can learn more about your rights under the FDCPA from the Federal Trade Commission (FTC) Debt Collection FAQ page and the Consumer Financial Protection Bureau (CFPB) page on Debt Collection.

This question applies to large corporations too. Say Corporation X feels you owe them money, but you feel otherwise. Can they send your account to collections? Don't they have to prove they are actually owed the money before attempting to collect on it?

Same answer as before. It doesn't matter how big the original creditor is. When the debt is a consumer debt (i.e. non business debt) the FDCPA regulates the collectors in what they can do in collecting the debt. Note that the FDCPA does NOT apply to the original creditor.

If the creditor or collection agency wants to do more to collect than just call or write you it will need to sue you for a judgment on the debt. (Unless you pledged property to secure the debt, in which case the creditor may take the secured property to collect.)

Final question: If that contractor or Corporation X does decide to take you to small claims court, don't they have to do so in the county where you live?

The FDCPA provides that when the collector sues to collect the debt (other than a mortgage debt on real property) the collector must file the lawsuit either in: "in the judicial district or similar legal entity --
(A) in which such consumer signed the contract sued upon; or
(B) in which such consumer resides at the commencement of the action."

But that rule does not apply to the original creditor. The original creditor may file the lawsuit in any place that is allowed under the applicable state law.

 

[Sylvestor McBean]

Thanks very much for the prompt and detailed reply! You said that the collection agency doesn't have any more power to collect the debt than the original creditor, but can't collection agencies harm your credit rating the longer you don't pay them? To me that has always seemed to be the only real threat collection agencies can make...
If the collection agency were to take you to court on a debt, they wouldn't really be able to argue the merits of the debt with the original creditor, right? They buy debt in bulk for pennies on the dollar so I wouldn't expect them to have an appreciation of the circumstances of individual debts (i.e., whether the original creditor is in the right, or I am).
Regarding where to file a lawsuit, say the original creditor is a large corporation headquartered in California, and I live in Kansas. If they take me to court in California and I don't show up, presumably they would get a judgement in their favor. However, then what? If I lived in the county where the judgement was made, they could eventually garnish my wages, put a lien on my car, etc. However, I live in Kansas. What's a court in California going to be able to do to me?

 

[Tax Counsel]

Thanks very much for the prompt and detailed reply! You said that the collection agency doesn't have any more power to collect the debt than the original creditor, but can't collection agencies harm your credit rating the longer you don't pay them?

Sure, the collector can report the debt to the credit bureau. But so could the original creditor, too.

If the collection agency were to take you to court on a debt, they wouldn't really be able to argue the merits of the debt with the original creditor, right? They buy debt in bulk for pennies on the dollar so I wouldn't expect them to have an appreciation of the circumstances of individual debts (i.e., whether the original creditor is in the right, or I am).

What information the collection agency will have will depend greatly on the type of debt and what it gets from the original creditor.

Regarding where to file a lawsuit, say the original creditor is a large corporation headquartered in California, and I live in Kansas. If they take me to court in California and I don't show up, presumably they would get a judgement in their favor. However, then what? If I lived in the county where the judgement was made, they could eventually garnish my wages, put a lien on my car, etc. However, I live in Kansas. What's a court in California going to be able to do to me?

The creditor likely could not sue you in California unless you consented to be sued in that state in the contract you have with the creditor. The court has to have personal jurisdiction over you for you to be sued in that court, and generally speaking that means that you would have to have sufficient contacts with that state to make you subject to suit there, unless you consent to be sued there.

The court doesn't collect the judgment; the creditor does. If the creditor does get a judgment against you in California but you have no assets or income to attach there, then the creditor has to take the extra step of domesticating that judgment in a state where you do have assets or income it may attach to collect. The U.S. Constitution requires states to give full faith and credit to the judgments and acts of other states. Thus all states, including Kansas, have a process allowing for domestication of judgments issued by courts in other states. Once the creditor gets the judgment domesticated in a state where you have assets or income to attach it may enforce that judgment just as it would if it had sued you in that state and got a judgment. So if the creditor domesticated the California court judgment in Kansas, it could enforce that judgment just as would if it had sued you in Kansas and got a judgment from a Kansas court.

 

[Sylvestor McBean]

Thank you again for the great reply. You're saying the contractor in my example could report me to the credit bureaus? What are the rules about who can report what? Does the contractor have to prove the debt in some way to the credit bureaus? What if I'm disputing the debt? What stops people from making frivolous/fraudulent reports to credit bureaus on people they're mad at?

 

[Sylvestor McBean]

I guess what I'm saying is, regardless of the original creditor vs. the collection agency doing the reporting, it doesn't seem fair to have a debt that hasn't been evaluated in a court of law negatively impact one's credit rating.

 

[army judge]

Paying a debt in collections is just as detrimental to your credit scores as an unpaid debt in collections.

Before you pay a debt in collections, ask the collection agency to send you a statement in writing, agreeing not to report your debt to credit bureaus after you pay it off.

Yes, a collection agency can report a debt to credit bureaus.

There is no waiting period before a debt collector can report you to the credit bureaus.

A collection agency will contact you after a creditor sells or transfers your account (debt).

Collection agencies have already reported to the credit bureaus by the time you hear anything about the debt.

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Before paying a debt collector, know your rights | Credit Karma





https://www.sapling.com/5110218/collection-agencies-report-credit-bureau





How Do Collections Accounts Affect Your Credit? - NerdWallet

You state that you don't owe him anything since he didn't fulfill his obligations to you, and he threatens to send you to collections.

You asked about a contractor doing shoddy work, and billing you for the doing the shoddy work.

A contractor is in a very unique position, if a person doesn't pay a debt.

The homeowner not paying the debt will usually discover the contractor has slapped a "contractor's lien" or a "mechanic's lien" on the home/property for the unpaid debt.

The lien will NOT impact the homeowner's FICO, but allows the contractor to get paid when home ownership changes hands.

The lien will also drive most buyers away from purchasing the home, or forces the homeowner to pay the debt to allow the sale to complete.

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Will a Mechanics Lien affect my credit report ? «

No, a mechanics lien won't impact your FICO score.


Here is a list of what will affect your credit report.

Late payments to creditors
Public Records, like judgments, bankruptcies, TAX LIENS, etc…..
Over charging on your credit cards
Collections
Too many inquiries on your credit report
Identity Theft

 

[zddoodah]

What are the rules governing what debts can and cannot be 'sent to collections'?

There are no rules because "sent to collections" isn't a phrase that has any legal meaning or significance.

In this scenario, since there is not agreement on the amount owed, wouldn't he have to take you to small claims court to try and get you to pay up?

If he claimed I owed money and I claimed I didn't, then his recourse would be to sue. Whether small claims court would be the appropriate venue would obviously depend on the amount in controversy.

Does a collections agency have any right to collect on a debt where the debtor disputes the debt?

Of course. If disputing a debt was all it took to cut off the creditor's ability to collect, no one would ever collect on a debt.

This question applies to large corporations too.

The answers don't change if the creditor is a natural person, a sole proprietorship, a corporation (large or small) or any other type of business entity.

Don't they have to prove they are actually owed the money before attempting to collect on it?

Huh? Prove to whom? "Attempting to collect" could mean any number of things. Some of those things require a judgment; many do not require that anyone prove anything to anyone.

If that contractor or Corporation X does decide to take you to small claims court, don't they have to do so in the county where you live?

Depends on a lot of factors, including whether the contract between the parties (if there is one) calls for a different venue.

You said that the collection agency doesn't have any more power to collect the debt than the original creditor, but can't collection agencies harm your credit rating the longer you don't pay them?

Sure, but so can the original creditor.

If the collection agency were to take you to court on a debt, they wouldn't really be able to argue the merits of the debt with the original creditor, right?

Sure it would. Why not?

They buy debt in bulk for pennies on the dollar

This is true of some collection agencies, but not all of them, and many collection agencies do both.

Regarding where to file a lawsuit, say the original creditor is a large corporation headquartered in California, and I live in Kansas. If they take me to court in California and I don't show up, presumably they would get a judgement in their favor. However, then what? If I lived in the county where the judgement was made, they could eventually garnish my wages, put a lien on my car, etc. However, I live in Kansas. What's a court in California going to be able to do to me?

If you have no assets or source of income in California, then a judgment issued by a California court will be of no use to your creditor. However, the creditor can take the California judgment and file an action in Kansas and ask the Kansas court to enter a judgment based on the California court. If that were to happen, you could object that the California judgment was not properly entered because the California court lacked jurisdiction over you.

 

[Sylvestor McBean]

So if my brother-in-law doesn't pay his share of the dinner bill, can I report him to the credit bureaus?

 

[army judge]

So if my brother-in-law doesn't pay his share of the dinner bill, can I report him to the credit bureaus?

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SPECIAL SITUATION ONLY


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31 CFR § 29.518 - Reporting delinquent debts to credit bureaus.




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Each of the three credit bureaus: Equifax, Trans Union and Experian charge a small fee to join their agency and will accept reported debts as small as $50.

Each credit bureau has its own guidelines for reporting bad debt but the general rule-of-thumb is to report debts that have gone unpaid more than 90 days.




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[Tax Counsel]

I guess what I'm saying is, regardless of the original creditor vs. the collection agency doing the reporting, it doesn't seem fair to have a debt that hasn't been evaluated in a court of law negatively impact one's credit rating.

A federal law known as the Fair Credit Reporting Act (FCRA) does regulate the reporting of debts by creditors and collectors to credit bureaus. Federal regulations issued under the Act require the person/entity reporting information to a credit bureau to adopt certain policies to ensure the integrity of the information being reported, including consideration of any dispute of the debt by the consumer. If a reported debt is disputed that is supposed to be noted in the report. The consumer also has the right to dispute the debt with the credit bureau and the credit bureau must then investigate the dispute. If the credit bureau upholds the report by the creditor/collector the law gives you the right to have the dispute noted on the credit report. However, it is not required that the creditor or collector first sue you for a judgment before the debt may be reported to a credit bureau. Some states impose more strict requirements than federal law does.

All it really takes to report a debt is for the creditor or collector to be a member of the credit bureau to which the debt will be reported, which costs some money to do. In reporting the debt the creditor/collector will need to follow the requirements the credit bureau has and to follow the FCRA and any relevant state laws.

 

[zddoodah]

So if my brother-in-law doesn't pay his share of the dinner bill, can I report him to the credit bureaus?

You can report anything you like to anyone. However, unless you have an account with one or more of the credit reporting agencies, your report will go into the trash. Do you have any such accounts?