Debt settlement

Credit & Lending

Debt-settlement companies

These for-profit companies claim that they can eliminate consumers’ debts by negotiating settlements with creditors that are a mere fraction of the outstanding debt. Many of these companies accomplish little for consumers and charge hefty fees. 

Many debt-settlement companies make promises that they simply cannot keep and leave consumers in worse financial state then when they began. These companies tell consumers to stop paying debts. They advise placing money into savings account so that enough funds will accumulate to allow a settlement offer to be made to any creditors.    

However, most consumers who sign up with these companies find the companies’ promises are empty. Creditors are under no obligation to settle for less money, and often refuse to do so. Consumers who follow the debt-settlement companies’ advice to ignore collection efforts or refer those efforts to the debt-settlement company usually continue to find themselves subject to creditors’ collection efforts, including lawsuits.  And the debt-settlement companies’ saving plans are often extremely unrealistic. The promised negotiated settlements usually do not occur, but the debt-settlement companies still take their fees. In addition, when they stop paying their debts, consumers find their credit histories further damaged.

  • Be wary of companies that promise to obtain settlements for much less money than you owe. Many of these companies misrepresent their typical results and success rates.
  • Avoid debt-settlement companies that require payment in advance of obtaining the promised settlement. 
  • Keep in mind that debt-settlement plans may not stop creditors from charging interest, late fees, or other penalties on outstanding debts, and do not prevent creditors from bringing collection lawsuits.  In addition, failure to make required payments on your debts will negatively affect your credit score.
  • Creditors are under no legal obligation to accept a settlement offer for less than the outstanding owed balance.
  • Only a small number of consumers who enroll in debt settlement plans are able to complete them. Usually, consumers drop out after having paid service fees to the companies without receiving any benefit from their enrollment.
  • If you enroll in a debt-settlement plan that has you stop paying creditors, who will probably face more frequent and aggressive collection efforts and possibly judgments, wage garnishments, and freezing of bank accounts.
  • Check with the Better Business Bureau to obtain a reliability report on a particular debt-settlement company and its rating.
  • If you want to resolve an outstanding account, it may be best to first speak directly to the credit card issuer or other creditor. 

Debt-collection companies

There are two types of debt collectors:

  • firms that collect debts owed to third parties
  • creditors to whom you owe money directly

The Federal Fair Debt Collection Practices Act (FDCPA) regulates the following

  • debt collectors who contact you on behalf of your creditor
  • debt collectors who contact you because they have purchased your defaulted account from the original creditor (or another debt collector) and are now trying to collect from you
  • law firms who regularly work on debt-collection actions

In addition, all debt collectors operating in New York, whether acting on behalf of a third party or on behalf of themselves, are required to follow New York State law (Article 29-H of the General Business Law) governing debt-collection practices.
Both federal and state laws regulate and restrict various debt-collection practices.

How may debt collectors contact me?

A debt-collection agency may contact you in person, by telephone, or in writing and must disclose the purpose of the contact. These agencies cannot contact you at inconvenient places or times (for example, before 8 a.m. or after 9 p.m.), unless you agree. A debt-collection agency is prohibited from contacting you at your place of employment if the agency knows that your employer disapproves.

What if I do not owe the debt?

To dispute a debt, you must write a letter to the debt-collection agency within 30 days of their initial contact with you. If you dispute a debt, the agency is prohibited by law from contacting you again until it sends you verification of your debt.  

How can I I stop debt collectors from contacting me?

Write a letter to the debt-collection agency to ask that they stop contacting you. Once the agency receives your letter, it may not contact you any further except to inform you that there will be no further contact or that it or the creditor intends to takes some specific action. However, submitting a letter asking a debt-collection agency to stop contacting you does not prevent the agency from instituting legal action against you to collect the debt. 

What should I do when I experience financial problems?

There is nothing to be ashamed about if you are experiencing difficulties meeting all your financial obligations. It is important, however, that you reach out for assistance if you believe you cannot handle your bills.

If you are experiencing credit-related financial problems or debt-collection phone calls, consider contacting a not-for-profit credit counseling agency that is licensed by the New York State Banking Department for assistance. Generally, these organizations offer assistance for free or at minimal expense in paying back your debts.

Debt-collection agencies are prohibited from engaging in the following harassing or abusive practices:

  • using or threatening to use violence or criminal means to harm you
  • using obscene or profane language
  • advertising your debt for sale
  • telephoning you repeatedly or continuously with the intent to annoy or harass
  • calling you without telling you who they are.

Debt-collection agencies are prohibited from using false or misleading representations:

  • falsely representing themselves as government representatives
  • falsely stating that they will seize, garnish, or sell any property or wages (note, however, that they make take these actions if they are legally able to do so)
  • falsely representing that you have committed a crime or that you will be arrested or imprisoned
  • falsely stating that papers resembling official documents are from a court or governmental agency, when they are not
  • making false statements about the amount of the debt
  • falsely representing that a debt collector is employed by a credit bureau
  • falsely representing that they are attorneys or that an attorney is involved in collecting a debt
  • threatening to communicate false credit information with any other person
  • using a false business name

Debt-collection agencies are also prohibited from the following practices:

  • collecting more than you owe
  • depositing a post-dated check before the date on the check
  • contacting you by postcard
  • threatening to take possession of your property through non-judicial action, when they have no right to do so

When a creditor is collecting a debt

Creditors may contact you directly about a debt you owe them. For example, your credit card company may call to remind you that you have not been making the minimum payments necessary to keep your account from defaulting. Generally, federal consumer-protection laws regarding fair debt collection do not apply in these situations, but the creditors are still required to comply with New York law governing debt collection.

The New York State Debt Collection Procedures Law prohibits creditors (and their agents) from:

  • communicating the nature of your debt to your employer before obtaining a judgment against you
  • threatening to take an action that it cannot or would not normally undertake
  • threatening to collect a fee over and above the debt you owe
  • communicating with you in a manner that simulates a judicial process or gives the appearance of being authorized or issued by a governmental entity
  • contacting you or a family member with such frequency or at such unusual hours as can be reasonably considered abusing or harassing you

Process servers: Know your rights

If a creditor decides to bring a lawsuit against you to try to collect a debt, it will typically hire a law firm to bring the lawsuit. Legal process servers are hired by law firms to serve legal papers notifying individuals that they are being sued.

New York law makes clear how the legal documents that start a lawsuit must be served on anyone being sued. A process server can:

  • deliver the summons directly to the person being sued
  • deliver the summons to a substitute person of suitable age and discretion at the place of business or the home of the person being sued and then mail the summons
  • if several attempts at the first two options fail, post the summons on the door of the home or workplace of the person being sued, and mail it as well

What should I do if I am served with legal papers?

If you are served with legal papers, it is important that you respond, even if you do not believe that you owe any money. If you fail to respond, the court may enter a default judgment against you, and the creditor may be able to seize money from your bank account or garnish your wages. 

What should I do if I have default judgment entered against me?

In recent years, the Office of the New York State Attorney General has uncovered fraudulent practices by certain process-service companies who claim that they have provided documents to individuals although they never did. 

In order to remove (vacate) a default judgment that has been entered against you for this or any other reason, New York law requires that you make an application to the court that entered the judgment.  To assist you with this application, you should consult an attorney.