If you default on a credit account, loan, or other debt, your creditor may "charge off" the debt and sell it to a debt buyer. Because so many California consumers have complained about unfair practices and tactics used by debt buyers, in 2014 the California legislature passed a new law -- the Fair Debt Buying Practices Act. The goal of the new law is to curb some of the previous abuses by debt buyers and provide more protections to consumers. the new law went into effect on January 1, 2014.
What Is a Debt Buyer?
When you stop making payments on a credit account (such as your credit card or auto loan), your creditor may “charge-off” your account and sell it to a “debt buyer” for less than what you owe. The debt buyer can then come after you for the payments, because it is the new owner of your debt. Debt buyers usually buy debts in bulk, usually for pennies on the dollar. (Learn more about how debt buyers work.)
Problems With Debt Buyers
There have been numerous accounts, in California and nationwide, of debt buyers buying charge-off accounts without bothering to get basic account information, such as the credit contract, from the seller of the debt. This meant that debtors were often at the mercy of unscrupulous debt buyers who rarely provided debtors with accurate information about previous payments or prior interest charges. It also wasn’t unusual for debt buyers to obtain unfair judgments in court.
What Does a Debt Buyer Have to Do Under the New Law?
Under the new Fair Debt Buying Practices Act, a debt buyer cannot take collection actions against you unless it has the following account information:
- your account balance when the creditor charged off your debt
- the amount of interest and fees added after the charge-off
- the date of the last payment you made or the default date
- the charge-off creditor’s name
- the account number of the charge-off debt
- your name and address that was on file with the charge-off creditor
- the names of every entity that ever purchased your debt, and
- a copy of your contract with the original creditor.
The Debt Buyer Must Inform You of Your Right to Get Account Information
Under the Fair Debt Buying Practices Act, a debt buyer must notify you that you are entitled to receive this same information. To make sure this happens, the debt buyer must include this language in the first letter it sends you:
You may request records showing the following: (1) that [insert name of debt buyer] has the right to seek collection of the debt; (2) the debt balance, including an explanation of any interest charges and additional fees; (3) the date of default or the date of the last payment; (4) the name of the charge-off creditor and the account number associated with the debt; (5) the name and last known address of the debtor as it appeared in the charge-off creditor’s or debt buyer’s records prior to the sale of the debt, as appropriate; and (6) the names of all persons or entities that have purchased the debt. You may also request from us a copy of the contract or other document evidencing your agreement to the debt. A request for these records may be addressed to: [insert debt buyer’s active mailing address and email address, if applicable].
The Debt Buyer Must Provide Account Information Within 15 Days
If you request account information, the debt buyer must comply within 15 days. If it does not provide the requested information within 15 days, it must stop collection activities until it can get the information to you.
Requirements for a Debt Buyer Lawsuit
If the debt buyer sues you, the new law requires that the debt buyer put all of the above information in the complaint (the legal document it files with the court to start the lawsuit). (Find out more about creditor lawsuits.)
Other Helpful Notices the Debt Buyer Must Provide
Even better yet, a debt buyer must tell you what it can and cannot legally do to you.
If the Debt Buyer Cannot Sue You, It Must Tell You That
Someone who wants to sue you must do so within a certain period of time, called the statute of limitations. In California, this can be two to four years depending upon whether your debt contract is oral or written. (Learn more about the statute of limitations.)
So, under the new law, the debt buyer must tell you if it is too late to file a lawsuit against you. This is the notice it is required to give:
The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it. If you do not pay the debt, [insert name of debt buyer] may [continue to] report it to the credit reporting agencies as unpaid for as long as the law permits this reporting.
It It's Too Late to Report to the Credit Reporting Agencies, the Debt Buyer Must Tell You That
In most cases, a credit reporting agency can report late payments or your default on a debt for seven to ten years, which is much longer than the statute of limitations for a lawsuit. This means that in some cases, a debt buyer can still ding your credit even if it can’t sue you. (Learn more about debt buyers and credit reports.)
But, if the debt is so old that it is too late to report it to a credit bureau, the debt buyer must provide you with this notice:
The law limits how long you can be sued on a debt. Because of the age of your debt, we will not sue you for it, and we will not report it to any credit reporting agency.
The Debt Buyer Must Provide You With Proof of Payment
Finally, if you make a payment or settle the account with the debt buyer, it must give you written documentation of the transaction within 30 days.
What If a Debt Buyer Violates the New Law?
The nice thing about this law is that it has teeth. If the debt buyer does not include all of the account information in the complaint, you can ask the judge to dismiss the case. (You may have other defenses to a debt buyer lawsuit. To learn about them, see Common Defenses in Debt Buyer Lawsuits.)
And if the debt buyer violates any aspect of the law, you may be entitled to:
- actual damages, and
- $100 to $1,000 in statutory damages.