Last week, I posted on options you may have if you are in debt and it is outstanding. If for whatever reason you cannot make arrangements for unpaid debt, the next step for most lenders is to send the unpaid debt to a collection agency. Collection agencies can be big and intimating institutions; they are supposed to be.  Most of us have not dealt with collection agencies, making it a daunting experience. What exactly can you expect and how do you deal with them?

There are three things to consider. First, by the time a collection agency calls you, your options are very limited. Your opportunity to be creative and work with the lender has probably expired; very rarely will the unpaid debt go back from the collection agency to the lender. Thus, as I wrote last week, don’t be in denial if you owe someone money- be proactive. By the time your unpaid debt is at a collection agency, the option isn’t so much “how can we make this work for everyone?” but “when are you paying your money?” To be a realist, you aren’t playing with a good hand by the time the collection agency calls you. Again, be very quick to come to some arrangement with your lender, if possible, before it gets to a collection agency.

Second, collection agencies are regulated and licensed. The requirements are different from jurisdiction to jurisdiction. I’ll deal mostly with Ontario law. Please consult a credit counseling service or lawyer about the laws and regulations on how collection agencies can deal with you regardless of jurisdiction. However, the point being, your real leverage against collection agencies is that their tactics of collection violate local laws and regulations and you can file a complainant with the appropriate licensing body who can fine or revoke their license; this is a collection agencies’ weak spot (my one war story from my lawyer days is that I informed a collection agency in writing it was violating regulations and within 2 hours I had a written response that it would not pursue my client for 14 days while I attempted to settle the issue with the lender direct). Remember you can complain about their tactics if they are off-side the law but it does not change the fact you owe money.

Third, seek help. A collection agency attempts to confuse debtors with what they can and cannot get away with. A collection agency has two main bargaining chips: put a bad credit score on the account and taking you to court. Everything else is really intimidation. Know your rights. Most governments have free credit counseling services to help you or seek legal advice.

A collection agency action is, in most jurisdictions, begun by written notice that they will contact you. Once this is begun, there are several things you need to know:

1. When does a collection agency have no case against you? Mistaken identity (happens more often than you think), debt was paid or a settlement entered into in writing or debt was a corporate debt not personally guaranteed and they are attempting to pursue a personal action against you (happens a lot; hire a lawyer and one short letter can solve this issue). The tricky situation is always if someone claims they provided a good or service which they did not and demand payment. In this instance, be proactive. As soon as you dispute this, paper it over with documentation, and (as strange as this sounds) tell the collection agency to send this file to court since they have no authorization to deal with disputed charges and (one hopes) you have documentation to win in court. Service providers tend to back down if you have papered over the dispute with names and dates and are willing to go to court to prove it.
2. What can’t a collection agency do? This really depends on the jurisdiction you live in. Most jurisdictions prohibit collection agencies from calling you at certain hours, at work, calling your employer and/or family except in special circumstances. Some laws prevent a collection agency from sending your file to court without written notice. Again, seek help. As soon as you have been contacted by a collection agency in writing, call a credit counseling service, lawyer or government (typically the same department that deals with consumer protection) and see what limitations collection agencies have in collecting your debt.
3. What can a collection agency do? This is simple: (i) collect as much of the debt as possible; or (ii) failing that, send the debt to court. With respect to (i), most collection agencies have very limited leeway on what they will accept as part of an installment payment (again, negotiate this before it gets to them) but, since most collection agencies are paid on contingency, they are willing to listen to any offer to pay down the debt which leads me to…
4. What can you do? Negotiate. The first call from collection agencies are typically “feeler” calls. Most of the time, they make some offer at less the face value of the debt (given that the lender has already written it down or off based on their historical rate of collection) but still terms which are hard for a down and out borrower to swallow. This is typically an opening offer. If you have an honest negotiation on your ability to pay the debt, you can come to a realistic solution. Collection agencies know that if you have unpaid taxes, debt to secured creditors ranking in priority or debt on vendor financing (i.e. a car loan), they are legally subordinate these other lenders so they attempt to strike a deal that gets their clients money while recognizing their subordinate positions. However, they don’t know this unless you tell them.
5. What’s the worst thing you can do? (i) Deny you owe the debt if you really do; (ii) refuse to negotiate terms (unless you truly have no means to pay it off in which case, seek credit counseling on your options); or (iii) negotiate terms you never intend or cannot keep. Dealing with collection agencies is 10 times worse than going for a root canal. The industry has to be nasty to try to get money from people who don’t want to pay so the quicker you can end the ordeal, the quicker you can move on with your life.

Let’s be realistic. If your debt is at a collection agency, and it is not paid off or there is some other reason why it should not be there,  you have little to no leverage in most cases. The above are options more to alleviate the pain than to negotiate some brilliant strategy to beat the collection agency (which begs the question of why you would utilize said brilliant strategy so late in the game).  Above all, seek help. The fact that the collection agency is calling you (assuming the debt is legitimate) speaks to a larger structural issue in your debt-management which also needs to be looked into. Good luck.