Remember the financial crisis of 2007-2008? There were a number of factors that contributed to this, but one of the largest was the scale of America’s debt.
In a nutshell:
Americans took advantage of mortgage rates and bought new homes in record numbers. These were often starter homes, frequently second homes, and more often than not, upgrades to larger homes in more desirable neighborhoods. Banks and mortgage lenders grew excited by this trend, and began lowering the bar for those wishing to purchase a home. People with little or no credit got loans. People with inconsistent credit histories got loans.
People who had filed for personal bankruptcy or had a foreclosure got loans.
Lending to these people was not – in and of itself – a bad thing. Many of these people used this forgiving market to try to re-establish their credit trustworthiness, and this was a noble goal.
But these banks and lenders began to buy and sell those loans. At each sale, the new holder of the loan could sell packages of these loans to other banks and lenders.
• Remember: a bank that buys your debt may NOT change the terms of your loan. The underlying contract of the original loan is still controlling.
When the market hiccupped, homeowners found themselves unable to meet their obligations, and the entire house of cards came tumbling down.
Much like vultures swoop in to clean a lion kill, banks turned to debt collectors to try and recover the money they had lost. They often sold debt collectors the debts themselves. It was called “selling paper.” You owe $1,000. The bank sells that debt to a collector for $500, making the debt less than a total loss. The debt collector tells you that you could be off the hook for the low, low price of $750.
The debt collector just made $250 for a few harassing phone calls chasing your paper.
We recently listened to a podcast about the return of these debt collectors and paper chasers. One woman reported having her checking account garnished to collect 19 cents.
Most forms of debt have a statute of limitations. In Virginia, generally speaking, written contracts have a 5 year limit, oral three, and open credit accounts are three years from the last payment or charge. Once a debt meets a limit, and is overdue with no payments, communications, or actions by either party, creditors can no longer attempt to collect it.
But there’s a loophole…
If you answer the phone and talk to a creditor, telling them that you have every intention of paying off that debt may be perceived as an oral contract, allowing them to revive your obligation. They may suggest a “good faith payment” as a sign of your faithfulness. An amount as small as $25 can change your status from “dormant” to “active,” and allow them to then pursue you for the debt, any interest, and any fees the collector wishes to assess.
One of the things that we do for our clients is help them get a handle on their debts. We know what debts need to be prioritized, and which ones may truly be forgivable “dead” debts. We help people avoid the harassing phone calls of the “paper chasers.”