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Debt Collection Basics

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What is a creditor?

A creditor is an individual or firm who is owed money. Something of value is given by the creditor to the borrower, who then promises to pay back the creditor later. Creditors come in all shapes and sizes. They may be banks, credit card companies, hospitals, local medical professionals, or any other company or individual to whom a debt is owed.

What are secured debts and unsecured debts?

A secured debt is guaranteed by collateral, or a valuable item to the creditor that they can use as payment if the loan or debt goes unpaid. Common examples 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 the promise that the borrower will pay later. Most medical and credit card debts are unsecured.

The 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 also sell your debts. Buying and selling debt is a legal and 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 collecting on and buying old debt. These debt buyers are held to similar standards as the creditors and are required to treat borrowers fairly and accurately report debts.

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 is unpaid, the creditor can sue for what is 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 State, there is a statute of limitation for filing a lawsuit within six years from the date that the borrower defaulted, which is about a month after the borrower’s last payment. However, in certain cases concerning credit cards, the statute of limitations can be as little as three years, and, if a creditor receives a judgment against you, the statute of limitations is 20 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 20 years to collect this debt.

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