Editorial Policy

Bluffing with a creditor can be a dangerous debt game

Erica Sandberg

October 29, 2015

QHi Erica,
I heard that a collection agency is not allowed to say they will sue me when they won't, but can I tell them that I will file for a Chapter 7 bankruptcy when I won't to get them off my back? — Gene  

ADear Gene,
Third-party debt collectors do have to follow the strict code of conduct when they communicate with people about money owed. The law is the Fair Debt Collection Practices Act, and you cite one of its key provisions: Collectors may not threaten a person with legal action unless they intend to go down that road.

Consumers, on the other hand, are not required to be quite so honest. You can tell a collector that you have no money when you really do, instruct others in the home to say that you've moved and have no forwarding address, or yes, say that you intend to discharge the debt in a Chapter 7 bankruptcy — even when you have no plans to file.

So let's talk about what a bankruptcy warning may or may not achieve.Ask Erica

First, know that collection agencies buy debts from other entities. That could be a credit card company, bank, hospital or even another collector. Odds are that the company that has contacted you purchased the account for considerably less than what they're trying to get you to pay (that is where their profit comes in). For example, if the balance is $2,000, the agency might have paid half. If they can inspire you to send the entire debt, the agency's profit is a cool grand (minus any overhead, that is).

If you include that debt in a Chapter 7 bankruptcy, the collection agency will lose its initial investment. Any business owner is loath to have that happen. Therefore, tell the collector that you're about to file, and the collection agency may be motivated to negotiate with you. Or the collector may decide to never contact you again.

The problem? If the debt is within the statute of limitations for lawsuits, the collector has the right to turn around and sue you for the balance due. That legal action can force you to file for bankruptcy even though you didn't want to do that, since being sued for a debt is no joke. Lose the case (chances are you will if you legitimately owe the debt), and a judgment will appear on your credit report. Some rather nasty post-judgment collection actions might be granted too, such as wage garnishments, property liens and seizure of assets. Additionally, the amount you owe will be far greater than what it is today, as court costs, attorney fees and pre- and post-judgment interest will be added to the bill.

But don't think that you can't negotiate with the creditor to reduce the debt only with the threat of bankruptcy. Know your rights with debt collectors. You can stop the calls by either paying the obligation in full or working with the agency to accept a reduced sum as a settlement. If the collector is unable to sue you because too much time has passed, consider sending a cease and desist notice. This will prevent future communication, and the worst that will happen after that is the account will remain on your credit file until seven years after it went bad.

And if you do pursue filing for bankruptcy? Well that's another matter.

Soon after submitting the paperwork, an automatic stay will go into effect. Anyone working for the collection agency will be prevented from contacting you until the scheduled creditors meeting. That will be their opportunity to ask questions, but in most cases creditors don't show up. Because the majority of bankruptcies are granted, attending would be a waste of the creditor's time and resources. Got a question for Erica? Send her an email.

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