The pandemic has been horrible for most people and businesses. However, one of the winners in the pandemic financial fallout has been debt collectors. In fact, your misfortune turns out to be their good fortune. There are a number of reasons for this, including the CARES Act, passed to protect workers. Let’s take a look at credit card debt and debt collectors.
Buying & Selling Debt
Like any other commodity, debt is sold and traded. A company wants to get the bad debt off their books and so will sell it at a discount to debt collectors. Collection agencies give up on one set of debt and sell them to another agency. This trading of debt means that old debt may suddenly revive itself and a new collection agency attempts to collect on its purchase.
The average debt is sold for 8.6 cents on the dollar. If you have an average debt of $3,142, that means that the debt collector purchases it for roughly $271.
Collection Agencies Suing Over Bad Debt
Once the debt goes into collections, it becomes relatively cheap for the collectors to sue. These suits account for 25% of all debt collection cases. Since very few people show up to contest the case, the case is settled in favor of the collector and the debtor may have wages or bank accounts garnished.
Collection agencies target their suits carefully. The most common suits are filed against people who make less than $40,000 a year and who live in poverty. These are demographics that tend to be more suspicious of the court system and more likely to not show up or know what to do about the suit.
The CARES Act
In response to the pandemic, the legislative branch passed the CARES Act, designed to protect people from mortgage and student loan foreclosures and evictions. However, it did not cover credit card or other types of debt, thus leading to a financial windfall for collection agencies.
In addition, as families cut down spending on non-essential items, many found themselves with a cash surplus. Add in the money from the stimulus and 25% of Americans decided to pay down old debt. Since much of this old debt was not being charged interest, paying down that old debt did not help the debtor in the long run. Instead, it only powered collection agencies.
One collection agency made more than $200 million in profits, doubling its previous earnings record. In turn, shareholders saw a 40% earnings growth and share prices skyrocketed.
Court Cases During The Pandemic
The pandemic closed courts for a short time but the court system adapted and are now open for business. Collection agencies are now filling thousands of cases a month – far more than they did in pre-pandemic years.
Now that the CARES Act has expired and Senate Leader Mitch McConnell is refusing to allow the House passed HEROS Act to be considered, there will likely be an increase in delinquencies, bankruptcies, and foreclosures.
With no help, low wage earners will use their credit cards to supplement their wages. This will increase the number of cases of unpayable credit card debts, leading to more court cases filed by collection agencies.
Financial Protection Laws
During the first shut-down in early 2020, creditors worked, somewhat, with debtors to put a 90-day hold or offer relief including forbearance. Collection agencies claimed to do the same, but in reality, debtors reported that the companies were extremely difficult to work with and while the garnishment of bank accounts slowed, the garnishment of wages increased.
Collection agencies have been very effective in fighting legislation that would ban companies from taking the last $1000 or $1700 in a bank account. As minimum wages are slowly increasing in many states, so is the proposed protection amount. As you may expect, collection agencies are fighting to be able to take more from minimum wage workers.
Another issue is that debt collection agencies are fighting consumer protection laws that have been somewhat weakened under the current administration.
What Can You Do If You Are Summoned?
Most debtors do not realize that it is extremely important to respond to all summons immediately. For specific advice on your situation, you should speak with an attorney licensed to practice law in your state. There are exceptions that can protect wages and certain classes, like head-of-household (providing more than 50% of support for dependants), can receive extra protections.
Each state has a set of expansion laws, so for the final word, you will need to find out what your particular state offers. However, in general, garnishment can not touch:
- social security
- child support
In order to file for exemption, the court will have a claim of exemption form. Fill it out and provide documentation as to why you should receive an exemption.
Agreeing to pay to avoid garnishment can lead to additional hardship as bills fall behind. So what to do?
Determine if it is a summons or a demand letter. Do Not Ignore the Summons – again, we recommend you speak with an attorney in your state for the best advice on how to proceed. It will not go away and you may be in a worse financial situation than you are now.
Step 1: Respond within 30 days in writing. The summons may have a date and time to appear. That date is not for you, it is for the debt collector. You must respond within 30 days of receipt or risk garnishment or other legal action.
Step 2: Make certain that the debt is actually yours. Debt collectors do make mistakes and may try to collect on debts that have aged out (generally 2 to 4 years in California).
Step 3: Gather together all documentation, payments, and correspondances concerning the debt.
Pacific Debt, Inc
Since you are on the Pacific Debt, Inc website, you may be interested in more help than our educational blog can offer. If your finances are out of control and debt has taken over your life, we may be able to help!
Contact one of our debt specialists today for more information, they will help explain your options.