Topic 5: Consumer Protection and Debt Collection-The Regulatory and
Legal Environment
Questions to Think About:
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What type of protections do consumers have?
How does the debt collection process work?
What are the different types of debt and what happens to unpaid debt?
What are the different types of debt collectors?
What are consumers’ rights regarding debt collectors and their tactics?
How can I help my client deal with debt collectors?
Learning Objectives:
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Understand the differences among original creditor, third party collector and buyers
of debt
Understand what debtor should do with different types of creditors
Understand how federal, state and city laws interface
Understand the pre-litigation, litigation and post litigation process
Topic 5 | Consumer Protection & Debt |
1
Overview of Regulatory Environment
•
Consumer protection laws exist on federal, state and local
(county, city, town, village) levels
•
Enforcement may take place through several different agencies
at each of the federal, state and local levels (e.g. Federal Trade
Commission and the Consumer Financial Protection Board may
both have jurisdiction over same institution or activity.
www.cfefund.org I 5
There are federal, state and local consumer protection laws. Oftentimes, more than one
federal, state or local agency is charged with protecting consumers, and therefore, there
may be regulation at the different levels of government as well as by multiple agencies
within one level of government. For example, the Federal Trade Commission and the
Consumer Financial Protection Board may both have jurisdiction over an issue.
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
Many clients seeking financial counseling are dealing with debt and debt collection.
Before we address debt collection, consumer rights, and consumer protections, let’s
look at the debt collection process when a debt becomes overdue.
.
Overview of Debt Collection Process
Generally follows this path, but not always
Debt is over due
De
to original
creditor
< 30 days Pay debt
plus late charges
&interest
Debt between 30
days to 120 days
over due to
original creditor
Reported to credit
bureaus – stays in
report 7 years –may
receive calls or
letters from original
creditor
Or
Original creditor retains
debt and continues debt
collection process by
writing, calling, etc.
Creditor charges off debt
after 180 days
Original Creditor
Third Party Collector
Debtor back on track
Debtor is back on
track
Pay debt plus late
charges & interest or
work out settlement
– credit score
impacted
Or
Original creditor retains debt
and hires debt collection
agent (agent or attorney
hired to collect pre-litigation
is third party collector).
Creditor charges off debt
after 180 days
Or
Original creditor
sells debt (buyer of
debt is third party
collector) usually
after it charges off
the debt after 180
days
Hires attorney to
start litigation
(can happen at
any time) ending
in settlement or
judgment
6
NOTE:
It is important to understand where a consumer is currently in the debt collection process. This guides
the consumer as to the options available. It is also important for the consumer to determine whether
the collector is the original creditor (in-house collector), or one who is defined as a third party collector,
because different rules govern the two. For example, the federal Fair Debt Collection Practices Act
(FDCPA) applies only to third party collectors. The consumer must also be clear about the specific type
of debt that is involved. There may be specific rules that govern specific types of debt such as credit
cards or revolving debt. There are also specific rules that govern student loans.
Even where there is no specific legislation governing the collection process, general law provisions such
as those that guard against fraud and misrepresentation, may protect a consumer from unscrupulous
actions by both original creditors and third party collectors.
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
ORIGINAL CREDITOR
There are fewer protections for consumers against the debt collection practices of the
original creditor. A purchaser of both debt in good standing and defaulted debt are
subject to the same defenses that the debtor would have had against the original
creditor. For example, if the original creditor breached a contractual term or violated a
statute which would have prevented the original creditor from collecting the debt, the
purchaser of the debt will also be prevented from collecting the debt based on the same
grounds.
Original Creditor Relationship
•Contractual relationship – governs creditor/debtor rights
•Direct privity of contract gives the parties rights and obligations between them
•Original creditor (assignor) can transfer (assign) its/his interest to a third party
(assignee)
Buyer may be treated as the original creditor, ex. Company X buys
Company Y and now owns the account
Buyer of defaulted debt becomes a third party collector for purposes of
collections laws
Buyer is subject to the obligations and any defenses available against
original creditor, ex. Statute of Limitations
Distinguish between debt
I7
whichwww.cfefund.org
is in good
standing
and defaulted debt. Buyers
of defaulted debt are defined
as third party collectors.
FEDERAL LAWS GOVERNING ORIGINAL CREDITORS INCLUDE:
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Federal Fair Credit Billing Act (FCBA) Applies to “open end” accounts, i.e.
credit cards and revolving charge accounts (not installment loans)
Truth-in-Lending Act (TILA) requires lenders to provide certain information so
consumers
Fair Credit Reporting Act requires providers of information to reporting
agencies to be accurate
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
What to do if collection proceedings are commenced by an original creditor:
Original Creditor – Suggested Actions for Debtor
1.
2.
3.
Do not ignore debt collection call or letter
If debt is incorrect or not yours, dispute immediately—best in writing (w/in 60
days if credit card or revolving credit –FCBA)
If debt is owed:
a. establish how much is owed – ask for break down of principal, interest , late
payment charges and other fees and when the default occurred
i.
Make a record of call, time , date, and name of caller by taking
notes or recording the call
b. Negotiate with creditors to make payments manageable (waive late fees,
payment plan)
c. Do not reveal financial information except for inability to pay – collector may
be fishing for assets or payment ability
d. Prioritize debts, pay more on high rate debt first
e. Know and assert rights during negotiation as leverage
f. Consider use of “cease and desist” carefully – ask instead that all contact be
in writing– a complete cease and desist may result in debtor not knowing
what steps taken by creditors
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1. It’s wise to monitor what is happening in the collection process rather than not responding or
ignoring communications from the creditor. This allows the consumer to take steps to protect
his rights, for example asserting his rights to exempt certain amounts such as SSI from
collection action by the creditor.
2. Although a consumer has the right to ask the collector to “cease and desist” from contacting
him entirely about the debt, it’s best to not assert a full “cease and desist,” but to request
that the creditor contact the consumer by mail and in writing only instead. If the consumer
asserts a full “cease and desist,” the creditor can continue collection proceedings such as
commencing a lawsuit without the debtor being aware.
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
Original Creditor – Suggested Debtor Action Steps cont’d
4.
If statute of limitations has passed ( time in which creditor must
bring a lawsuit on debt)
a. Check to see what the statutes of limitations are for:
i.
Written Contracts
ii. Oral Contracts
iii. Promissory Notes
iv. Open Accounts (credit card or other revolving loans)
b. Do not acknowledge debt or make partial payment – will restart the statute of limitations clock
i.
“ I do not acknowledge the debt, but if it were owed, the
statute of limitations has expired.”
c. Creditor not required to disclose expiration of statute, but cannot
lie if asked
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1. If the statute of limitations has run (the law that governs when an action must be brought
before the collector is barred from bringing the action) be sure not to reaffirm the debt by
either acknowledging that the debt is owed or making a partial payment. Once there has
been a reaffirmation of the debt, the statute of limitations begins to run all over again.
2. In some jurisdictions, the statute of limitations may differ depending on whether the debt is
based on a written contract, an oral contract, and a promissory note or is an open account.
Statutes of limitation are based on state law. Sometimes, the statute of a state other than
the state of the consumer’s residence governs because the consumer agreed to the
application of another state’s law in the agreement (including credit card agreements), or
because of a state’s position on which state’s law applies.
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
Third Party Collectors
Third Party Collectors
Laws Governing Collection Practices
Third party collectors include:
1. Collection agencies hired by original creditor
2. Collection lawyers hired by original creditor
3. Buyers of defaulted debt (and collectors on their behalf)
www.cfefund.org I 16
Note: Anyone collecting on behalf of the original creditor, i.e. not an in-house collector
who is a member of the original collector’s staff, is a third party collector. This includes
an outside collection agency, and attorneys hired by the original creditor to collect
payment. Purchasers of defaulted debt are third party collectors, and do not take on the
position of original creditor, the way that the buyer of debt in good standing, or the buyer
of the creditor company or entity would be considered the original creditor.
Regardless of how a third party collector is engaged in the process, the third party
collector is subject to whatever defenses the consumer had against the original creditor.
FEDERAL LAWS GOVERNING THIRD PARTY CREDITORS INCLUDE:
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Federal Fair Credit Billing Act (FCBA – applies to both original creditors and
third party collectors)
Fair Debt Collection Practices Act (FDCPA applies only to third party
collectors)
Fair Credit Reporting Act (FCRA - applies to both original creditors and third
party collectors)
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
What to do if collection proceedings are commenced by a third party collector:
Third Party Collectors
Suggested Debtor Action Steps
1.
2.
Request information
Do not ignore debt collection call or letter
a. If a call: ask callers for name, address, contact telephone
number, license number or registration number where applicable
i.
How much is owed – ask for break down of principal,
interest , late payment charges and other fees and when
the default occurred
ii.
Make a record of call, time , date, and name of caller by
taking notes or recording the call (check whether your state
allows you to do so without other party’s permission, or
advise them you are recording)
iii. Ask for validation letter (although supposed to send
automatically), including name of original and current
creditor
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Note: The consumer should make sure to gather as much information as possible, and
to make a record of the conversations by taking notes contemporaneously with the call
if contacted by phone. If contacted by mail, retain all correspondence including the
envelope which documents both when the communication was first made, and whether
the creditor/collector has complied with the requirements on information it should
provide the consumer.
Topic 5 | Consumer Protection & Debt |
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DEBT COLLECTION
Third Party Collectors
Suggested Debtor Action Steps cont’d
b. If contact in writing – request validation letter if required
information not included in the first letter
i. Validation letter should be sent within 5 days of initial
contact
with consumer (unless all information contained in initial letter).
ii. Must contain information on consumer’s right to
dispute debt.
iii. All communication must include collector’s identity,
name of original creditor, amount of debt, call back number, name of
person to call back.
www.cfefund.org I 21
1. Ask for a validation letter which must contain all the information required if that
information is not included in first written communication from the third party collector. If
the first contact is by phone, then ask for the validation letter from the caller. The
validation letter must contain the following:
 Amount of debt
 Name of creditor (current)
 Amount of the debt
 Must provide statement that unless the consumer, within thirty days after receipt
of the notice, disputes the validity of the debt, or any portion thereof, the debt will
be assumed to be valid by the debt collector
2. The collector is supposed to automatically send the validation letter within 5 days
after the first contact with the consumer. If no validation letter is received, send a
request in writing for the validation letter.
Note: Failure of the collector to comply with the FDCPA, may prevent the collector from
being able to collect the debt, so the consumer will want to document that a validation
letter was not sent.
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DEBT COLLECTION
Third Party Collectors
Suggested Debtor Action Steps cont’d
4.
Upon receipt of validation letter, immediately request verification of debt in
writing even if you recognize debt
a. Don’t be pressured into making payments before receiving verification
5.
What if no validation letter is issued?
a. If after validation requested the creditor refuses to cooperate, then creditor
may not legally collect the debt. If the collector does, then the law is violated
and debtor can sue for damages may be brought.
www.cfefund.org I 22
1. Upon receipt of the validation letter, request a verification letter, even if the
consumer recognizes the debt.
2. The debt verification letter requires that the collector provide documentation from
the original creditor.
Note: While this letter is being prepared by the collector, no action may be taken; this
allows the consumer some time to consider an appropriate plan of action or to seek
counseling or legal assistance.
Topic 5 | Consumer Protection & Debt | 10
DEBT COLLECTION
Third Party Collectors
Suggested Debtor Action Steps cont’d
6.
If debt is owed:
a. Negotiate with creditors to make payments manageable
b. Do not reveal financial information except for inability to pay –
collector may be fishing for assets or payment ability
c. If many late bills, consider enrolling in debt consolidation
program (look at credit unions)
d. Prioritize debts, pay more on high rate debt first
e. Know and assert rights during negotiation as leverage
7.
Consider use of “cease and desist” carefully – ask instead that all
contact be in writing – a complete cease and desist may result in
debtor not knowing what steps taken by creditors; if consumer asks
creditor to cease and desist in contacting him – creditor can send
one more notice to advise on actions to be taken
www.cfefund.org I 23
1. It is important to monitor all communications from a third party collector so that the
consumer is aware of all possible actions being taken by the collector.
2. In the case of debt that is owed, the consumer should seek guidance on how to
handle the debt such as negotiating a payment plan, settlement or engaging a debt
management program. This allows the consumer to be in control rather than having
actions taken by a collector which ultimately results in freezing of assets such as bank
accounts or garnishing wages. These actions by a collector can trigger consequences
for the consumer if frozen accounts cause other checks to bounce and cash flow to be
restricted, etc.
Topic 5 | Consumer Protection & Debt | 11
DEBT COLLECTION
Third Party Collectors
Suggested Debtor Action Steps cont’d
7.
Keep a copy – front and back – of every letter received from or sent to
the debt collection agency.
8.
If statute of limitations has passed (time in which creditor must
bring a lawsuit on debt ):
a. Do not acknowledge debt or make part payment – will restart the statute of limitations clock
i. “ I do not acknowledge the debt, but if it were owed, the
statute of limitations has expired.”
b. Creditor not required to disclose expiration of statute, but
cannot lie if asked
10. Confirm in writing any payment plan/settlement agreement
reached by consumer within 5 business days
www.cfefund.org I 24
Note: Pay attention to the applicable statutes of limitation. It is the default on the debt in
the hands of the original creditor that starts the clock on the statute of limitations, and
not when the third party collector begins its collection process. If the original creditor
would have been time-barred from collecting the debt, then the third party collector is
too.
Topic 5 | Consumer Protection & Debt | 12
DEBT COLLECTION
The rules that govern the debt collection processes of the original creditor and third
party collectors apply to the pre-litigation phase of the collection process, i.e. a lawsuit
has not been commenced.
Once a lawsuit has been filed, and a decision is made by a court, a judgment will be
issued by the court (the judgment may not be final if the consumer appeals the decision)
for the amount owed to the creditor or third party collector. The judgment can be
enforced by levying (taking possession of and/or selling) property or assets, or
garnishing wages and bank accounts.
The items set forth below cannot be levied or garnished under a court issued judgment
for non-payment of a debt.
What is Exempt from Being Levied to Satisfy Debt Judgments?
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Supplemental Security Income (SSI)
Social Security Retirement
Social Security Disability (SSD)
Public Assistance (Temporary Assistance for Needy Families, TANF)
Income Earned while Receiving SSI or Public Assistance
Disability Benefits
Workers’ Compensation Benefits
Earned Income – Washington State
The exempt part of your net wages is
Veteran’s Benefits
the greater of 35 times the current
Black Lung Benefits
federal minimum wage or 75% of your
Spousal Support, Maintenance (alimony), or Child Support net wages. ("Net wages" means gross
Railroad Retirement
pay minus taxes, Social Security, and
Unemployment Benefits
other mandatory deductions.) Call the
Department of Labor to find out the
Retirement Accounts; Public & Private Pensions
Earned Income
 30 times the minimum wage per week ($217.50)
 90% of gross income or 75% of net
Most personal property
current federal minimum wage, or
check this website:
http://www.dol.gov/esa/whd/flsa/
Then multiply that amount by 35.
To learn more, go to
www.washingtonlawhelp.org/issues/co
nsumer-debt/debt-collection .
Exempt Income Protection Act
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1
If account contains “directly deposited exempt benefits”: $2,500 cannot be frozen1
As of May 1, 2011, all Federal benefits from the previous 60 days will be protected under a new
Treasury Department rule, even if they exceed the $2500 amount protected under the state law. This
includes: Social Security benefits, Supplemental Security Income (SSI) benefits, VA benefits, Federal
Railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal
Topic 5 | Consumer Protection & Debt | 13
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All other accounts: $1,740 cannot be frozen
Excess funds in account will be frozen
DEBT SETTLEMENT SERVICES
Counselors should make sure that clients do not fall victim to debt
settlement companies!
What is Debt Settlement?
Debt settlement companies promise “debt relief,” claiming they can wipe out debts by
negotiating lump-sum payments for less than is owed.
Debt settlement companies may tell a consumer to stop making payments to creditors
and instead pay into a special “settlement” or escrow account. Meanwhile, the creditors
continue to late fees and interest, so the debt may double or triple. The consumer will
still face legal actions by creditors trying to collect the debts while working with a debt
settlement company.
In the majority of cases, debt settlement does not work and costs consumers
thousands of dollars in fees, leaving them even further in debt.
Know Your Rights About Debt Settlement
As of October 27, 2010, the Federal Trade Commission requires debt settlement
companies that sell their services over the phone to comply with new consumer
protections:
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Be aware: Up-front fees may be illegal. For-profit debt settlement companies that
sell their services by phone cannot legally charge a fee before they settle or reduce
a debt. (Sales by phone include calls to the consumer through direct telemarketing
and calls by the consumer in response to an advertisement.) Debt settlement
companies that charge up-front fees are breaking the law.

The money a consumer pays into a settlement account belongs to the
CONSUMER! Money that a debt settlement company asks a consumer to set aside
in an “escrow” or “settlement” account belongs to the consumer. The consumer may
cancel the account at any time, and the escrow company must refund all of the
money minus any fees the settlement company legally earned.
Employee Retirement System benefits. There are cases where this federal rule could provide greater
protection than the state law.
Topic 5 | Consumer Protection & Debt | 14
WARNING: Consumer Protections Do Not Always Apply
If a consumer enrolls in debt settlement online or face-to-face at a sales presentation or
storefront, the protections on upfront fees, disclosures, and escrow accounts do not apply. Do
not sign up for a fee-based plan online or in person at a “debt settlement” workshop
where the company can charge you up-front fees without violating the law.
Beware of Debt Settlement Services

Don’t pay high up-front fees. Walk away from any company that tries to charge
fees before services are performed. If a debt settlement company tries to charge a
consumer before achieving a settlement, file a complaint with the Federal Trade
Commission (FTC). Go online to ftc.gov or call 877-FTC-HELP (877-382-4357).

Be wary if a consumer is directed to enroll for debt settlement service online
or in person. Debt settlement companies that use these tactics may be trying to
evade the ban on charging fees up-front.

Don’t assume that debt settlement companies are acting in the consumer’s
best interest—or are legitimate. Companies will claim to be nonprofits, to use
lawyers, or to be affiliated with the government to try to lure consumers in.

Know that debt settlement plans initially will increase debts and are extremely
unlikely to reduce any of debt in the end.

Beware of damage to the credit score and risk of legal action. Debt settlement
can do long-lasting damage to a consumer’s credit score, affecting the ability to get
a loan, a credit card, or even housing or a job in the future. Creditors may take legal
action against the consumer, such as collection activities, lawsuits, freezing bank
accounts and garnishing wages.

Save the paperwork. If a consumer has been in contact with a debt settlement
company, save any advertisements, letters, contracts, statements, or other
documents received. And take notes about the phone calls.
Topic 5 | Consumer Protection & Debt | 15
Topic 5 Exercise #1
Directions:
Review the following scenario and tell us how you would counsel Marta and Bobby.
Case Study
After Marta lost her job – the family used credit cards to make up for the monthly deficit as
follows:
Card
Master Card
Visa
Discover
Dept. Store Card
Balance
$2,500
$1,900
$4,850
$0
Total credit line
$5,000
$3,000
$15,000
$1,500
Interest rate
10.99%
24.99%
11.99%
22.00%
All of the credit cards are jointly held. Bobby has a 712 credit score, and Marta has a 690 score.
They recently missed the monthly payment on one of the cards by 45 days, and were charged a
$25 late fee, on two invoices plus the interest.
The credit card company for which his payment was late, called Bobby at work, and left a
message with a co-worker asking him to call their 800 number and leaving the name of the
caller. Bobby didn’t get the message, and the card company called again the next morning.
This time, the caller this left a message with his co-worker saying that Bobby’s payment was
overdue.
Marta has a savings account with $500 that pays 1.50% interest per year.
Bobby’s mother and brothers sent him $1,500 for his birthday last week.
Topic 5 | Consumer Protection & Debt | 16
Topic 5 Exercise #2
Marta and Bobby feel that they are finally on their way to being able to take control of their lives
now that they have received the inheritance from Marta’s aunt, and have paid off debt, and have
set some funds aside for the future.
One day, Bobby was home and received a phone call at 10 pm from a company claiming that
Marta owed them $100,000. The next morning the caller phoned at 6 am demanding to speak to
Marta. Marta answered the phone and decided to hang up and ignore it believing it was a crank
call.
That evening, at midnight the caller phoned again. This time Bobby told him they were going to
call the police if he did not stop calling.
3 months later, Marta received a call from her bank indicating that all of her funds in all of the
accounts that she and Bobby had, were frozen, due to a judgment obtained against her in
another part of the state. The plaintiff, a loan company had sued her for $100,000 plus interest,
based on a personal loan and promissory note that was in default for over a year. The bank
notified her that they would turn over the money to the plaintiff as required by the garnishment
within the next few days.
Marta has never heard of the loan company, and when she called the attorneys, was told that
she signed the loan agreement 18 months ago, and the name, social security number and date
of birth were correct. However, Marta has never lived at the address they had for her. They said
they had a copy of the cancelled check for the loan proceeds, and that she deposited it into an
account she had in another town. Again, Marta had no knowledge of the loan, the depository
bank or the town.
She and Bobby hurry down to see you. Their rent and utility payment checks, along with their
credit card payment checks all bounced. Now everyone was bombarding them with calls, letters
and e-mails. They were penniless.
What would you have advised them if they had come to see you right after Bobby received the
very first phone call? How would you advise them in the current situation?
Topic 5 | Consumer Protection & Debt | 17