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How to Beat Junk Debt Buyers in Court

Chloe Meltzer | October 19, 2022

Don't be clueless when a debt lawsuit comes your way.

Summary: On average, junk debt buyers purchase old debts for only 4% of the original amount, then they turn around and collect the full amount to make a huge profit. It's common for these debt accounts to have an expired statute of limitations. Armed with the right information, you can use SoloSuit to beat junk debt buyers in court.

In most cases, being sued for debt is a scary experience. What you might not know is that many attorneys representing debt buyers do not have the proper documentation to sue you. Summons and Complaints are often sent out to people who assume they either need to give up the money or hide, but this is not the case. You should always respond to a Summons and Complaint with a legal Answer, but you should also ask for proof of their ability to collect your debt.

In US courts of law, whoever is suing you for debt must prove that you signed a credit agreement or that you agreed to pay the debt in some way. Most junk debt buyers do not have this but assume you won't ask for the proof. That is why you need to know your rights and how to handle a court case with junk debt buyers.

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How does your debt get to junk debt buyers?

When you first apply for a credit card, payday, or auto loan, defaulting is the last thing on your mind. Consumers open accounts with the conviction that they can meet the terms and conditions of the loan. However, unfavorable financial times, like the loss of a job or the rising cost of living, can cause even the most disciplined borrower to miss one or more monthly repayments.

Your creditor will remind you that you are late on the account. And they may even hire a third-party debt collector to collect on their behalf. If their attempts fail, and you are about 180 days delinquent, the account will be “charged off.” This means that the original creditor has written off the “bad debt.” Then, the creditor will do one of the following:

  • Clear books of the bad debt
  • Take a tax write-off
  • Collect off of bad debt insurance
  • Sell the debt to a debt collection agency (debt junk buyer)

If they decide to sell, they could do so to a private debt collector or a junk debt buyer. Junk debt buyers typically buy several accounts (portfolios) rather than individual accounts. And they are usually single-minded about getting you to pay.

The crazy thing about debt buying is that, on average, debt buyers purchase delinquent accounts for only 4¢ per dollar of the original amount. In other words, if you have a debt of $1,000 with a credit card company, and it gets sold to a debt collection agency, they will likely purchase the debt for around $40. And when they turn around to collect the debt from you, they make a huge profit if you pay off the debt in full.

The graphic below further illustrates the debt buying process:

debt buying process

Is buying debt legal?

As inconvenient as it is to consumers, buying and selling junk debt is legal. That hasn't stopped the industry from having the most consumer complaints. Some feel that junk debt buying has completely altered the court systems in the country. Many courts are clogged with such cases, and default judgments are too common.

And sometimes, debt buyers use illegal means to make more money. The Fair Debt Collection Practices Act (FDCPA) sets forth guidelines designed to protect consumers from unfair debt collection practices. Know your rights to remain safe from illegal collection practices.

The culture of buying debt gained momentum in the late 1980s and early 1990s during the savings and loans crisis. During that time, the government auctioned off close to $500 billion in unpaid loans to the private sector. The private collectors profited from this venture; since then, the debt buying practice has only grown. Today, debt buying is a multi-billion dollar industry.

How do junk collection account buyers know which accounts to buy?

When the debt is charged off, you still owe the debt. It just means that you no longer owe the original creditor because someone else has purchased it.

Today, buying and selling debt is just as easy as listing used items on eBay. Check this debt market website, for example. The seller keeps an updated list of portfolios to choose from. And buying a set of accounts is as simple as registering as a buyer and signing an NDA. Of course, buyers who intend to collect must be licensed debt collectors in the state where they intend to operate. They must also play according to the Fair Debt Collection Act (FDCPA) rules.

Junk debt collectors buy an electronic file of information about each portfolio. They may not be able to purchase individual contracts and statements for each account.

Once the creditor sells the account, it will be placed with many others in a portfolio. A debt portfolio can include hundreds or thousands of accounts. Your account is likely to fall in a group with the same type of accounts charged off during the same period, for example, consumer credit card loans, payday loans, internet installments, auto loans, etc.

Junk debt buyers will buy these portfolios for a small fraction of the original debt amount, but they will try to collect the full amount. At this point, you no longer deal with the original creditor but rather the debt collector. This is typically when a lawsuit will be filed against you for the full amount. They may also sue for court costs and attorney's fees, and accruing interest.

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How to beat junk debt buyers in court

Typically, a junk debt buyer doesn't know much about the debt. They have thousands of debt names on a spreadsheet that they will attempt to collect. In many cases, they do not need to prove they owe the debt because consumers will ignore the lawsuit.

This is the wrong thing to do. If you ignore the lawsuit, then a default judgment will be placed against you. This will allow the junk debt buyer to garnish your wages, pull money from your bank account, and even freeze your assets.

If you challenge the lawsuit and ask for proof, you have a much higher chance of beating the lawsuit or even settling for a smaller amount. This can be done out of court and is called a “settlement.” Because they have purchased your debt for a small amount, they are usually willing to let it go for less because they will still make money on their investment.

Use an arbitration clause to beat junk debt buyers in court

One method that is unknown to many is using the arbitration clauses in consumer contracts for your benefit. Most underlying credit card agreements or contracts in debt buyer lawsuits contain mandatory arbitration clauses. This means that you can force the plaintiff (the company or collection agency suing you) to withdraw the case from the court and use private arbitrators to come to an agreement instead.

There are a few reasons why you might want to arbitrate within your debt-collection proceedings:

  • Arbitration increases the cost of collection for the junk debt buyer.
  • Arbitration is an informal process that allows you to defend and represent yourself.
  • Attorneys of debt buyers are often not familiar to the arbitrators.
  • Arbitration does not appear in the public record section of your credit report if you lose.

File a Motion to Compel Arbitration with SoloSuit.

Filing a Motion to Compel Arbitration works—here's why

Debt collection lawsuits are typically cheap and effective. If you choose to go through arbitration, it is carried out by a private arbitrator. Most credit card arbitration agreements state that the debt buyer must pay all of the arbitration fees. These can be extremely expensive, as compared to a debt collection lawsuit.

Additionally, unlike a standard court case, a debt buyer cannot recover its court costs in the arbitration award. Therefore, arbitration will always be more expensive for the debt buyer. Plus, these costs cannot be shifted to the consumer should you lose. In many cases, the debt buyer will forgo the lawsuit altogether to avoid this.

If the debt buyer won't drop the case, you still have a better chance of leveraging a good settlement. This means that instead of paying a higher settlement because you have no leverage, you will have the opportunity to ask for a settlement even as low as 30% of the total amount owed. If you do settle, ensure that the debt buyer includes the following in the conditions:

  1. Do not sign an agreed judgment.
  2. Delete the trade line from your credit report.

Benefits of arbitration

In an arbitration, the debt buyer is unable to turn the junk debt into a “super debt.” This means that you can no longer have a default judgment placed against you. Notably, this saves you from wage garnishment and asset seizure.

If you cannot have a judgment placed against you, the statute cannot start. This gets you closer to the statute expiring and being unable to be sued for debt entirely.

Although arbitration is not the best choice for every junk debt buyer lawsuit, it can be the right choice for many. You need to examine your options and consider the pros and cons, but remember to always send a legal response via an Answer to the debt buyer first.

To learn more about how arbitration works, check out this video:

The statute of limitations on debt can protect you from junk debt buyers

Surprisingly, junk debt buyers purchase and try to collect some debts that are past the statute of limitations.

The statute of limitations is the time period that a debt collector or creditor has to sue someone for a debt they owe. Once the statute of limitations has expired, you cannot be taken to court over it. The statute of limitations on debt varies by state, but it is generally around six years.

Remember that the statute of limitations on debts protects you. If a creditor or a junk debt buyer doesn't sue you within the limited time they have, they lose their right to sue. However, some debt buyers bank on your ignorance. They hope that you will pay blindly so they can trick you into resetting the clock on the statute of limitations.

Do not take their bait. Your best defense is always to check the statute of limitations on the account first. If it has expired, do not pay. In some states, promising to pay can restart the clock, and they may be able to sue you.

Armed with the Motion to Compel Arbitration and statute of limitations knowledge, you can beat any junk debt buyer in court.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

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