Many people are unsure about which debt collection practices are legal, and which are prohibited. This confusion can lead them to pay more than they owe, especially when a debt collector violates rules set by the federal Fair Debt Collection Practices Act (FDCPA).
Here’s a closer look at a common question: Can debt collectors add interest charges to existing debt?
Can Interest Be Charged on Debt?
If you’ve ever taken out a loan or gotten a credit card, you know that debt almost always comes with interest. Before you receive your funds or a line of credit, you must sign an agreement that stipulates the interest rate you’ll have to pay.
But what happens if you don’t pay your account as agreed and the debt is sold to a collection agency? Can debt collectors add interest to an existing account? The short answer here is “sometimes.”
The Consumer Financial Protection Bureau (CFPB) notes that a debt collector may not add interest that isn’t authorized by the law or by the original debt agreement.
Your original contract should state whether interest rates can increase. For example, some agreements may say that if the debt goes to collections, you will be responsible for collection costs.
Other agreements may allow the interest rate to increase by a certain percentage. Similarly, each state has the freedom to set laws limiting increases of interest.
Post-Charge-Off Interest Can Be Complicated
Although debt collectors are allowed to add interest in some cases, many do not. The American Bar Association (ABA) explains that the legal landscape around this topic is murky:
- Debt collectors must know individual state laws on adding interest
- Some judges require collectors to tell debtors about accruing interest
- Other judges have ruled that a jury must decide whether a debt collector may charge interest
Debt collectors who violate the Fair Debt Collection Practices Act and similar laws can be heavily fined and face other penalties. Many collectors have decided that adding interest after an account has been charged off is simply too risky.
Can Debt Collectors Add Additional Fees?
The law surrounding additional fees is the same as the law concerning interest. If state law and/or the original debt agreement allows it, a debt collector may add fees.
Because it can be difficult for collectors to keep track of when they may and may not add fees, many avoid doing so altogether.
Can Debt Collectors Add Interest After Lawsuits?
If the collector sues you for a debt and wins, a debt judgment will be entered against you. The court will then typically impose a “post-judgment interest rate,” which is separate from any interest the debt collector may have added before.
The exact interest rate can vary based on the court. If you have a debt judgment, paying as soon as possible will reduce the total amount you have to pay over time.
Tips for Dealing With Debt Collectors
No one looks forward to hearing from a debt collector, but knowing the following information may help make the experience less overwhelming.
The Law Limits How Often Collectors Can Call You
Plenty of people tolerate repeated calls from collectors because they think they have to, but the law limits how often a collector can call you.
Some people use the shorthand “7-in-7 rule” or “777 rule” when referring to such restrictions. What is the 777 rule with debt collectors? It has two main provisions.
First, collectors may call only seven times in seven days about any one debt. Second, if they have a conversation with you, they may not call back for another seven days.
You Can Tell Collectors to Stop Contacting You
Sick of nonstop calls? You may have heard people mention a “magic phrase” to stop collectors from bothering you. What is the 11-word phrase to stop debt collectors?
It’s simple: “Please cease and desist all calls and contact with me immediately.”
However, remember that even if a debt collector stops contacting you, it doesn’t mean the debt goes away.
Collectors Are Required to Verify the Debt
Before you panic or start rushing to take out loans to pay off debt collectors, make sure that the debt is actually yours — and that the collector can prove it.
The CFPB says that U.S. debt collectors must send you a debt validation notice with information about your debt. If the debt isn’t yours or you don’t believe you owe it, you have 30 days to file a dispute.
The collector must stop trying to collect the debt until they can send proof that you owe it. If they are unable to verify the debt, you don’t have to pay.
Protect Your Rights and Your Finances
Can debt collectors add interest? The answer depends on your individual circumstances. If a collector is charging you interest, investigate to make sure they’re doing so legally.
Many people avoid spending time thinking about their debt because it’s so stressful. However, even taking a few minutes to learn about your rights could save you money.
The more informed you are, the more empowered you become to take control of your financial future.
