- Federal law, state laws, and the ethics of the collection industry guide the debt collection process.
- Commercial debt collection agencies can contact you frequently, modify your credit report, and contact friends and family.
- You shouldn’t ignore collection agencies, but you should dispute bad debts, seek legal assistance, and be aware of the limitation periods for business debts.
- This article is intended for small business owners whose businesses are in debt.
As a business owner, being in debt is scary. However, it is important that you familiarize yourself with commercial debt collection laws. These laws govern what collection agencies and in some cases creditors can and cannot do when pursuing debts you owe.
Debt Collection Laws for Businesses
If a seller or one of your customers is trying to collect a debt from you, they should follow federal and state debt collection laws. Additional codes of ethics apply. We will explain these rules below.
Commercial Collection Agencies of America (CCAA) Code of Ethics
The Commercial Collection Agencies of America (CCAA) recommends that collection agencies follow the CCAA Code of Ethics. All CCAA member agencies must follow this code, while nothing binds non-member agencies to these practices.
Key CCAA provisions that collection agencies should follow (and debtors should be aware of) include:
- Collection agencies should prioritize fairness, honesty and courtesy.
- They should avoid activities that “would blame” the collection industry or the CCAA.
- Collection companies should avoid using company names or headings that imply ties to the federal government or the court system.
- They should not perform the functions that a lawyer would perform.
- Collection companies should avoid making misleading statements to debtors or sending misleading documents.
- They must take due account of the debtors’ problems.
- The collections representative must validate the receivables if a debtor requests it.
- Agencies should not harass debtors in person or over the phone. (To note: Email and social media are not specifically named by the CCAA.)
- If the debtor has hired a lawyer to represent them, the agency should work with the debtor’s lawyer, unless the lawyer is no longer responding, in which case agencies can contact the debtors.
- CCAA-compliant bodies should not falsely threaten that the creditor has filed or will file a lawsuit unless the creditor has authorized the initiation of legal action.
- Agencies should not threaten to contact vendors and debtor financial institutions about the debt or do so.
If you believe a collection agency has violated the CCAA Code of Ethics, your lawyer can advise you on how to file a complaint against the agency.
Did you know? The CCAA Code of Ethics is binding on collection agencies belonging to the CCAA and prohibits agencies from engaging in certain tactics.
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Consumer Debt Collection Laws
There are different laws that govern how agencies can collect a debt owed by a consumer.
The Fair Debt Collection Practices Act (FDCPA)
The Fair Debt Collection Practices Act (FDCPA) is federal law that collection agencies, but not creditors themselves, must follow when collecting debt. Its provisions state that:
- Collection agencies cannot call outside after certain hours. Any call received from a collection agency before 8 a.m. or 9 p.m. in the called time zone violates the FDCPA.
- You can ask that collection agencies not call you at work. Agencies must comply with this request under the FDCPA. However, the FDCPA does not allow you to request that calls not be made to your home.
- You cannot be contacted if you have appointed a lawyer. If you hire a lawyer to represent you, collection agencies should only contact your lawyer, not you. Your lawyer will tell you what the agency says, and you and your lawyer can respond as needed.
- Friends and family cannot be hassled. Collection agencies looking to pay off your debts may contact your friends and family once. Additionally, collection agencies may only contact your friends and family to locate you and may not disclose that they are looking to pay off your debt.
- Collection agencies must validate your debts. Within five days of your first contact, a collection agency must send you a debt validation letter to remain FDCPA compliant. This letter should state how much debt you owe and how you can pay it off.
- Collection agencies cannot threaten legal action. Although collection agencies can add debts to your credit report, they do not have the power to sue. They can’t seize your property or seize your paycheck. However, a debtor can sue you, in which case you and your lawyer must appear in court.
- Collection agencies cannot send false information. It is not uncommon for collection agencies to present themselves as something they are not. However, the FDCPA makes this behavior – which can include sending documents on forged legal letterhead or claiming your debt is criminal – illegal.
If you suspect illegal activity by your creditor or their collection agency, talk to your lawyer. You can also file a claim directly with the Federal Trade Commission.
Laws on debt collection of state enterprises
In addition to the FDCPA and the CCAA Code of Ethics, states have their own regulations that creditors must follow when dealing with consumers. However, these laws often do not apply to businesses.
For example, the California Fair Debt Collection Practices Act, also known as the Rosenthal Act, protects against unfair or deceptive practices and harassment from creditors and collection agencies if you live in California. Unlike the federal FDCPA, the California FDCPA applies to creditors, not just collection agencies. However, it does not cover business debts, so none of its guidelines apply if your debts are related to your business and not your personal finances.
Colorado, Florida, and Illinois have similar laws.
Under Washington State law, collection agencies cannot contact any third party. Additionally, collection agencies pursuing debts from Washington debtors cannot force debtors to incur additional telephone charges beyond their usual costs.
To remember : The FDCPA and several state laws govern how consumer debt can be collected. Laws govern how and when creditors can contact consumers to collect unpaid debt.
How a commercial debt collection agency works
If a creditor feels that interacting with you is no longer a viable way to collect their debts, they can engage a commercial debt collection agency. These agencies specialize in pursuing debts from your business and other B2B debtors while complying with trade debt collection laws.
If a collection agency is hired to collect a debt from you, you may be called multiple times, in addition to receiving formal notices. Commercial debt collection agencies may also contact your friends and family to locate you. Plus, they can edit your credit report to show that your account is in collection.
Debt collection agencies, however, have limited powers. They cannot chase, arrest or threaten you. Your creditor will need to hire a lawyer to sue you, and you will need to hire a lawyer to defend you.
Advice: Don’t ignore collection agencies, but dispute bad debts and don’t hesitate to seek help.
Best Practices for Managing Trade Debt Collections
If you have commercial debt and are dealing with collection agencies, keep the following in mind:
- Never ignore a collection agency. It only makes your situation worse. Make a plan to pay off your debt if it’s valid, or challenge it if it isn’t.
- Dispute incorrect debts. You can dispute debts if you can provide sufficient proof that the debt is incorrect. This proof can include copies of invoices, checks sent, checks cashed and more.
- Pay the bill or hire a lawyer. If the debt is indeed valid, pay it. If it’s invalid or if you can’t afford it right now, hire a lawyer. A lawyer can help you make a payment plan, guide you through the bankruptcy process, negotiate with creditors, and more.
- Know the statute of limitations. In some cases, your debts may be too old to be valid. Depending on your condition and the type of debt you owe, your debt can expire three to ten years after it was first charged against you. If you determine that your debt has exceeded the statute of limitations, your creditor’s case is moot.