When being notified that a debt has been turned over to collections, many are surprised to find that the amount that was owed to the Original Creditor has increased significantly. I can't count the many times I've been asked, “Can they do this?” Meaning, can a collection agency add on additional costs, interest, and fees to the amount that was originally owed?
When a debt has been charged off, more than likely the original creditor will sell the debt to a collection agency soon after. You'll start to get letters and calls with their attempts to collect on these recently purchased debts. If you bother to look at your statements, you'll notice something else — the increase in the ‘Amount Owed' section.
Is this legal? Well…. yes; under certain circumstances.
Section 808(2) of the Fair Debt Collection Practices Act states “A debt collector may attempt to collect a fee or charge in addition to the debt if either:
(a) the charge is expressly provided for in the contract creating the debt and the charge is not prohibited by state law, or
(b) the contract is silent but the charge is otherwise expressly permitted by state law.
Conversely, a debt collector may not collect an additional amount if either:
(a) state law expressly prohibits collection of the amount
or
(b) the contract does not provide for collection of the amount and state law is silent.”
Section 808(3) goes on to state that state law determines what is considered to be a reasonable fee or even if fees are legal
To summarize, a collection agency would need to abide by the terms in the agreement you signed with the original creditor – which most of us don't read. Don't fret. One of the things you ask for when you send the collection agency a validation letter is a copy of the original contract with your signature on it. That way you can determine if the amount they are charging is legit. It's also noteworthy to point out that if additional fees and interest are allowed it starts at the time the collector owns the debt, not at the time it was charged off.
This is because when a creditor charges off a debt they typically stop charging interest. If they continued to charge interest they would need to send you monthly statements, according to the Truth In Lending Act. If they continued to charge interest, this would increase their losses. To avoid wasting paper and manpower putting it on their books every month, they'd rather just be done with it, charge it off and sell it to a collection agency.
Once the debt is sold, the collection agency can charge interest, without sending you monthly statements, because they are not held to the Truth In Lending Act.
Let's put this into perspective: You default on your credit card. They charge it off after 6 months of non-payment and stop charging interest and stop all collection activity at the time of the charge off.
They then sell the debt to a collection agency. Your credit card contract/agreement specifically stipulates that if your account falls into collections due to lack of payment, your interest will continue to accrue. The interest will start to accrue when the collection agency purchases the debt. They cannot backdate it from the time of charge off. To add, if the amount specified in the contract is larger than what your state allows to be charged, state law prevails. The collection agency will only be able to charge what the state allows.
So, how do you know if the collection agency has charged you the proper amount of fees and interest? Well, again, you want a copy of the contract. Then you want a full accounting, meaning a full explanation of how they arrived at the ‘Amount Due' total.
That's just to start. A lot of experts claim that when a debt collector purchases a debt; all the rights, title, and interest that the original credit has gets transferred with the purchase. However, there are other laws that state differently. In the US law encyclopedia, American Jurisprudence, 73 Am Jur 2d. Sections 90-93; it says that one cannot subrogate onto a contract that they were not originally on, did not have any interest to protect, and then claim successor in rights and interests. Thus, when an original credit sells the debt, they give up their rights to collect on the debt, BUT they do not give those same rights to the collection agency. The collection agency cannot act as a substitute for the original creditor.
Confusing right, that's how our laws work! One law gives them permission, another takes it away.
No matter the argument, the addition of fees and interest benefits only the collector; this is why they can settle a debt for such a steep amount and still make a nice chunk of money. You didn't think it was your stellar negotiating skills did you? 🙂
Just remember, before you pay anything VALIDATE VALIDATE VALIDATE!
Hopes this helps!
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~ Netiva
