If you live in California and have old debts – debts that you have not been able to make payments on for the last few years – you may be affected by the new California law regarding debt collection.
For many common types of debts – such as credit cards – creditors have a specific time window, normally four years from the date of the last payment, to file a lawsuit to collect the debt. This is not new. What is new is that, starting this month, debt buyers are prohibited from filing a lawsuit to collect a debt if this time window (called “statute of limitations”) has lapsed, and they have to adhere to more strict guidelines to document and prove validity of the debt.
Over the years, collection agencies would buy old debt accounts and then bombard the court with lawsuits, in many cases after the statute of limitations has lapsed or right before it would lapse, and frequently provided scant information about the debt. If the defendant responded to the lawsuit and put in time and vigorous effort – and money – to defend himself or herself, and showed that the debt was time-barred, then the collection agency would lose. What’s disturbing is that by default, collection agency would win the suit and would be able to get a judgment allowing the agency to garnish wages, or put liens on the person’s real estate, or levy funds from the bank accounts. It seems that this was a mode of operation for many collection agencies: betting that many people receiving the lawsuits would not realize they have to respond, or would be too stressed or scared to challenge the agency in court and probe for more information , or would not have the knowledge and the funds to be able to respond properly – and then by default, collection agency would net an easy win.
The new law is supposed to limit this “gotcha” tactics and prevent debt buyers from filing lawsuit which is for time-barred debt or for which they don’t have sufficient detailed documentation to prove validity of the debt.
This is a good law and should help consumers.
However, before we cheer, some words of caution:
(1) Collection agencies will adapt to the new law. Most likely, they will start keeping better records and more documentation, and will likely start filing lawsuits earlier after the last missed payment to make sure they are still within the statute of limitations.
(2) Collection agencies may develop some new tricks. For example, here is what some of the agencies were doing: they would file a lawsuit, and then if the defendant responded, they would ask the court to dismiss and close the case; once the person’s guard was down and he or she thought the issue had been resolved, the collection agency would file another lawsuit and start from scratch, requiring a new response and giving the agency a new chance to win by default. I have had some clients that received judgments against them this way because they did not recognize that the new lawsuit required a response; sometimes it was not clear to them that this was a new case, as the case caption and all other information submitted by the collection agency looked the same as they had already seen. With the new law, collection agencies may in some cases be barred from doing this, but they may come up with something else to increase their chances of getting a judgment.
(3) Don’t underestimate the damage that a potential judgment can do. One of the reasons that people sometimes don’t respond or follow up regarding the lawsuit, is a (frequently mistaken) belief that they are in such bad financial shape that there is nothing a collection agency can take from them even if it won. In reality, a judgment would usually allow the plaintiff to garnish a person’s wages no matter how small the person’s income is, no matter how many dependents he or she has, and high how medical expenses or any other living expenses are. Typically, the garnishment is 25% of each pay check until the debt – with legal fees and interest – is paid off. Besides garnishment, creditor can also go after funds in the bank accounts, put liens on the person’s property that may force sale or payout to creditor eventually, and more. Having a judgment gives a creditor not only more ways to collect, and more aggressive ways to collect, but also more time to do it as well.
In short, if you have debt that’s difficult to manage or that has gone unpaid for a long time, the new law may help but don’t assume that you should not take active steps to protect yourself and understand your rights if you received a lawsuit, or threats of lawsuit, or collection statements. Filing bankruptcy may potentially be a good solution – bankruptcy court issues orders creditors to stop , and from pursuing collection activities, including lawsuits at any stage of the suit. For more information and analysis of your financial situation, contact your local bankruptcy attorney.