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Debt Collection Basics

What is a creditor?

A creditor is a person or firm to whom money is owed. The creditor gives something of value to a borrower in exchange for a promise that the borrower will pay them back at a later date. Creditors come in all shapes and sizes. They may be credit card companies, banks, hospitals, local medical professionals, or any other person or company to whom a debt is owed.

What are secured debts and unsecured debts?

A secured debt is a debt or loan that is guaranteed by collateral. Collateral is an item of value that the creditor may take as payment if the debt remains unpaid. Common examples of secured debts include mortgages or car loans. A secured credit card is back by a savings account or other collateral and the credit limit is usually based on the value of the collateral. A debt or loan is unsecured if it is backed only by a promise to pay at a later date. Most credit cards and medical debts are unsecured.

Collection Process

If a debt is not paid, creditors will almost always turn the debt over to a collection agency. Medical creditors tend to turn debts over to collection agencies quicker than other types of creditors. Credit card companies may keep the debts for longer because they often have their own collection departments. If you are facing financial difficulties and will not be able to make payments, it is important to inform your creditor about such difficulties.

Creditors may sell your debt to another company. The buying and selling of debts is legal and has become a growing practice in the United States and worldwide Many, if not most, creditors will eventually sell delinquent debt accounts to a company that specializes in buying and collecting on old debts. These debt buyers are held to similar standards as the creditors and are required to report debts accurately and treat borrowers fairly.

Most debts may only appear on your credit report for seven years, starting at the date of delinquency. This start date does not change regardless of the number of times the debt is bought and sold. The debt buyer has a legal obligation to ensure that all information regarding the debt is up to date and accurate, including the date of delinquency. In certain cases, the debt buyer may use the date it received as the date of delinquency. This practice is illegal and consumers have right to dispute the date used in their credit reports.

Debt Collection Lawsuits

If a debt remains unpaid, creditors may sue for the remainder owed. In some cases, creditors may be less likely to sue if: (1) voluntary payments are made; (2) the debt is disputed and a reasonable defense has been raised; (3) the debt is less than $1000; or (4) the creditor does not have a history of suing people. If you have been sued by a creditor, respond. It is never a good idea to ignore a creditor’s lawsuit. It is important to contact an attorney for legal advice.

In New York, the statute of limitation for filing a debt collection lawsuit is six years from the date of default. A statute of limitations is a time limit for filing a law suit. The date of default is approximately one month after your last payment. However, in certain cases concerning credit cards, the statute of limitations may be as short as three years from the date of default. If the creditor receives a judgment against you, the statute of limitations for collecting the debt is twenty years.

Creditors may sue you for an old debt for which the statute of limitations has expired. However, this may be asserted as a defense in court. If you appear in court and raise this defense, the court will dismiss the case against you. However, if you do not appear, the judge will enter a default judgment against you and you will be liable for the judgment amount even though the statute of limitation had expired. Unless the default judgment is vacated, the creditor has twenty years to collect this debt.

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