- Federal law, state laws and collection industry ethics guide the debt collection process.
- Commercial debt collection agencies may reach out to you frequently, modify your credit report, and contact your friends and family.
- You shouldn't ignore collection agencies, but you should dispute incorrect debts, seek legal assistance, and know the statutes of limitations on commercial debts.
- This article is for small business owners whose companies owe debts.
As a business owner, being in debt is scary. However, it's important that you familiarize yourself with business debt collection laws. These laws govern what collection agencies and, in some cases, creditors can and can't do as they pursue debts you owe.
Debt collection laws for businesses
If a vendor or one of your clients is trying to collect a debt from you, they must follow federal and state debt collection laws. Additional ethics codes apply. We'll explain these rules below.
The 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. Any agencies that are members of the CCAA must follow this code, whereas nothing binds nonmember agencies to these practices.
Key provisions in the CCAA that collection agencies must follow (and that debtors should know) include:
- Collection agencies must prioritize fairness, honesty and courtesy.
- They are to avoid activities that “would bring reproach on” the collection industry or the CCAA.
- Collection companies should avoid the use of company names or letterhead that implies connections to the federal government or the judicial system.
- They must not perform the duties that a lawyer would perform.
- Collection firms should avoid making deceptive statements to debtors or sending deceptive materials.
- They must give due consideration to debtors' problems.
- Collections representative must validate debts if a debtor requests it.
- Agencies must not harass debtors in person or by phone. (Note: Email and social media are not specifically named by the CCAA.)
- If the debtor has hired an attorney to represent them, the agency must work with the debtor's lawyer, unless the lawyer becomes unresponsive, in which case agencies can contact debtors.
- CCCA-abiding agencies must not falsely threaten that the creditor has filed or will file a lawsuit unless the creditor has authorized commencing a lawsuit.
- Agencies must not threaten to contact the debtor's vendors and financial institutions about the debt nor do so.
If you believe a collections agency has violated the CCAA Code of Ethics, your attorney can instruct you on how to file a complaint against the agency.
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Debt collection laws for consumers
There are different laws that govern how agencies can collect on a debt owed by a consumer.
The Fair Debt Collection Practices Act (FDCPA)
The Fair Debt Collection Practices Act (FDCPA) is a federal law that collection agencies, but not creditors themselves, must follow when collecting on a debt. Its provisions state that:
- Collection agencies cannot call outside out of certain times. Any calls received from a collection agency before 8 a.m. or 9 p.m. in the time zone being called violate the FDCPA.
- You can request that collection agencies not call you at work. Agencies must comply with this request under the FDCPA. The FDCPA does not allow you to request that calls not be made to your home, however.
- You cannot be contacted if you have appointed a lawyer. If you hire a lawyer to represent you, then collection agencies must only contact your lawyer and not you. Your lawyer will tell you what the agency says, and you and your attorney can respond as needed.
- Friends and family can't be harassed. Collection agencies pursuing debt repayments from you can contact your friends and family once. Additionally, collection agencies can only contact your friends and family to locate you and may not reveal that they are pursuing debt repayment from you.
- Collection agencies must validate your debts. Within five days of first contacting you, a collection agency must send you a letter of debt validation to remain FDCPA-compliant. This letter must state how much debt you owe and how you can repay it.
- Collection agencies cannot threaten lawsuits. Although collection agencies can add debts to your credit report, they lack the authority to file lawsuits. They cannot seize your belongings or garnish your wages. A debtor, however, can sue you, in which case you and your lawyer must appear in court.
- Collection agencies cannot send false information. It's not unheard of for collection agencies to pose as something they're not. However, the FDCPA makes this behavior – which may include sending documents on forged legal letterhead or claiming that your debt is criminal – illegal.
If you suspect illegal activity from your creditor or their collection agency, speak to your lawyer. You can also file a claim directly with the Federal Trade Commission.
State business debt collection laws
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, safeguards 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 doesn't cover business debts, so none of its guidelines apply if your debts are for your business, not your personal finances.
Colorado, Florida and Illinois have similar laws.
Under Washington state law, collection agencies cannot contact third parties whatsoever. Additionally, collection agencies pursuing debts from Washington debtors cannot cause debtors to incur additional phone fees beyond their usual costs.
How a commercial debt collection agency works
If a creditor feels that interacting with you is no longer a viable route for recovering their debts, they may hire a commercial debt collection agency. These agencies specialize in pursuing debts from your company and other B2B debtors while adhering to business debt collection laws.
If a debt collection agency is hired to recoup a debt from you, you may be called several times, in addition to receiving demand letters. Commercial debt collection agencies may also contact your friends and family to locate you. Additionally, they can alter your credit report to show that your account is in collections.
Debt collection agencies, though, have limited powers. They cannot sue you, arrest you or threaten you. Your creditor will need to hire a lawyer to sue you, and you will need to hire a lawyer to defend yourself.
Best practices for dealing with business debt collections
If you owe business debt and are dealing with collection agencies, keep the following in mind:
- Never ignore a collection agency. Doing so only exacerbates your situation. Come up with a plan to pay your debt if it's valid or contest it otherwise.
- Dispute incorrect debts. You can contest debts if you can provide ample proof that the debt is incorrect. This proof can include copies of invoices, sent checks, cashed checks and more.
- Pay the bill or hire a lawyer. If the debt is indeed valid, pay it. If it's invalid or you just can't afford it right now, hire a lawyer. A lawyer can help you arrange a payment plan, walk you through bankruptcy, 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 state and the type of debt you owe, your debt may expire three to 10 years after it was first levied against you. If you determine that your debt is past the statute of limitations, your creditor's case is moot.