3 common collection agency questions, answered


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Dear Bankruptcy Adviser,
1) If my credit card debt has gone to a collection agency, can the collection agency sue me and get a judgment against me?

2) If they do get a judgment, can I claim bankruptcy (Chapter 7) after the judgment, and include the credit card/judgment debt in the bankruptcy?

3) -OR- If I agree to the collection agency’s terms to pay over 24 months, can I make a couple of payments and still file for bankruptcy when I get the bankruptcy information ready for my lawyer?
— Kirk

Dear Kirk,
These are great questions. While the answers are very easy, I completely understand why people think that each step could change your options.

Question 1: Can a collection agency sue me?

Absolutely. In fact, the collection agency generally has the most incentive to sue you. Most of the time, the collection agency has purchased the account either directly or through a third party from the original creditor. The collection agency pays pennies on the dollar for the right to collect on the entire outstanding balance.

That means a collection agency could buy a $1,000 outstanding balance for as little as $50 (5 percent of the outstanding balance) while having the right to collect on the entire balance. It can also charge an interest rate as high as 34 percent on the entire outstanding balance until it is paid.

If the collection agency has paid only 5 percent for an account, it likely will pay a little more to sue and get a judgment.

Question 2: Can I include the judgment and account in my bankruptcy?

Absolutely. Many people incorrectly think a judgment transforms the debt into something that can’t be eliminated in bankruptcy. There are times when this is true, usually in cases of fraud. A judgment obtained in which the creditor alleges fraud may not be dischargeable in bankruptcy.

However, the vast majority of judgments obtained for unpaid credit cards, unsecured or unsecured loans, medical bills, or business debts do not include a fraud claim. Those judgments usually are granted for a breach of contract. You agreed to pay on the loan and did not. That is a breach of contract and enough for the creditor to request and receive a judgment against you. You can also eliminate that judgment and the underlying debt in bankruptcy.

Question 3: Can I pay the collection agency for a while then file bankruptcy?

Absolutely. This is also very common. You attempt to make the payments for a while, but find it impossible to continue. In the example you give, you are trying to buy yourself time while you put together your bankruptcy petition. This is also permissible. It usually does not make sense to pay a collection agency while also paying an attorney to file your bankruptcy case; however, there are times when I have employed this strategy.

These are great questions, and good luck with your final decision. If you are sure bankruptcy will best resolve your financial situation, I hope you can file soon and start rebuilding. Ultimately, you do need credit again. Good luck.

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