Don't ignore that debt collector

By Liz Pulliam Weston

The rules of engagement with debt collectors have changed dramatically in recent months, and even people who pay their bills on time need to understand what's happening.

In fact, a good chunk of the complaints pouring into the Federal Trade Commission lately come from consumers who don't owe the debts for which they're being pursued.

Unfortunately, being innocent won't protect you from harassing phone calls, dunning letters or credit score damage.

And if you do owe money, you can expect even-more-aggressive collection efforts as the economy deteriorates and consumer delinquencies spike.

Here's why:

• A huge and growing market in old debt. I've tracked the explosive growth of this controversial part of the collection industry in previous columns. Collection agencies buy and sell debts that are typically years old and which may be poorly documented. Since collectors often don't have enough information to find the right debtors, they cast a wide net and sometimes wind up hounding the wrong people.

• The damaged economy. Living in bad times means more people with bad debts. This means collection agencies have more business but a tougher time getting borrowers to pay up, which can lead to more-aggressive tactics. Newly hired collection agents, added as agencies bulk up, may not understand the nuances of the laws governing fair debt-collection practices, and the industry has long had a problem with rogue collectors who do know the law but flout it.

• The rise of collection law firms. In the past, people often were given the advice not to talk to debt collectors -- to simply hang up when they called. The idea was that anything you said could be used against you, so it was better to say nothing.

These days, however, people who refuse to talk to collectors may be more likely to get sued.

"More creditors are working with collection law firms," as opposed to regular collection agencies, said credit expert Gerri Detweiler, author of several books on savings and debt. "If you don't respond, you could run the risk of triggering a lawsuit."

• Drowning in debt? Ask a credit counselor, free, on MSN Money's message board

While collection agencies can hassle you and report your bad debts to credit bureaus, they have to hire a law firm to actually sue you and garnishee your paychecks. Collection law firms can skip the middleman, making them much quicker to sue.

Exactly what you should say depends on the situation you're facing.

1. When you don't owe the money.

If you're sure a collector has the wrong person, you can write the agency a so-called cease-communications letter saying you're not the debtor and demanding the agency stop contacting you.

Under the federal Fair Debt Collection Practices Act (.pdf file), that's supposed to stop the calls, and the collection agency isn't allowed to contact you again unless it's to advise you that it plans to take some specific action, such as filing a lawsuit -- which is unlikely if it's really not your debt.

There are two caveats here:

• To send a cease-communications letter, you have to know who is calling. By law, the collection agency is required to send you a letter within five days of its first contact with you. In addition to including its own contact information, the agency letter is also required to tell you how much you supposedly owe, the name of the creditor and what to do if you don't think you owe the debt.

Some unethical collection agencies ignore this law. They call over and over without leaving more than a call-back number, if that.

If you talk to one of these collectors, you may be able to get the identifying information you need if you play along -- to a point.

"You might be able to get them to give you the name and address of the company under the guise of: 'I have to look into this and ask my spouse about this debt,'" Detweiler said.

If that doesn't work, an Internet search on the number that shows up on your caller ID, or the call-back number, if any, may yield results.

• It may be your debt after all.The debt may be the result of a dispute and you may well feel it's unfair, but that doesn't mean the collection agency has the wrong person.

Don't try to pretend you don't know anything about a debt if you do. Instead, see whether you can settle the problem with the original creditor or negotiate with the collector to settle the debt in exchange for removing it from your credit report. You can always sue the original creditor in small-claims court, but allowing an unresolved debt to trash your credit is foolish.

Continued: The statute of limitations

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