Understanding debt collection


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I was late returning a rented DVD and the shop now claims I owe $100. I have now received a letter from a debt collection agency demanding I pay the amount owed immediately plus a $50 collection fee. Can the DVD rental shop do this?

The short answer is yes it can. And it can do it at any time and without first warning you that the amount owed has been turned over to a collection service to chase you for payment of the claimed owed amount.

There is no obligation for the DVD shop, or any other supplier for that matter, to phone first or to try to negotiate the debt payment with you prior to the legal letter being sent or legal action being threatened.

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Anyone can send a legal letter if you are in payment default. It is only when you have a loan agreement or credit contract that sending a legal letter must be preceded by sending a default notice.

When you sign up as a customer with the DVD rental store, in the fine print it will explain that you agree to paying any outstanding fines, lost DVD replacement costs or lost rental income from late returned or lost DVDs.

It is best therefore if you lose a DVD to offer to buy a replacement as soon as possible, to reduce the risk of lost rentals being added daily or weekly (depending on whether it was a daily or weekly rental) to your bill, and if it is late, to own up to the lateness and negotiate to pay the late fee. You may be able to pay in instalments, but you probably cannot hire another DVD until outstanding fees have been paid.

If you let the matter ride and wait for the DVD shop to chase you via debt collection, you will owe more and risk receiving a legal letter demanding immediate payment.

What should I do if a legal letter arrives in my letter box?

Always seek legal advice from the consumer legal action service in your state before responding. You need to know what your rights are. One of these is to ask for a copy of the contract, not only to check what the supplier or service provider is entitled to charge you, but also to determine whether they can levy administration charges or legal enforcement costs.

Even if these are permitted in the contract, you may be able to challenge excessive or unreasonable enforcement costs.

If the lender/supplier does not have a contractual right to charge for legal and enforcement costs, they cannot charge you these unless they go to court and get a default judgement.

The difference between this sort of agreement and personal credit arrangements is that for the latter the lender must issue a default notice before commencement of legal or enforcement action. A supplier can just commence legal action, although usually a letter of demand is sent as a matter of practice. Depending on the amount owed and your financial circumstances, you may be able to negotiate payment by instalment.

Is there any cap on the size of the administration or collection fee that can be charged?

The fee charged can't be plucked out of the air and must be reasonable. Also it can't be levied unless there is provision to do so in your agreement. If you think the fee is over the top, ask for it to be itemised and how it is calculated. You can challenge the amount charged or agree to a more reasonable fee.

Often people receive such a fright when confronted with a legal letter that they just pay up. Always check what they are allowed to charge and the arithmetic. Don't accept any figure on face value.

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