Feeling overwhelmed? Most folks do, and understandably. Between the constant obnoxious phone calls, threatening letters, and just downright jerky behavior, it can feel like you’re in a financial war zone dealing with debt collectors.
The purpose of this article is to walk you through exactly what you need to know when dealing with collection agencies. Including your rights as a consumer, debt collection tactics, credit score implications, how to negotiate with debt collectors.
And potentially paying off debt in collections for some folks, and finally how to clean credit report dings, blemishes, and negative items. Because a 2014 study by the Urban Institute found roughly 77 million American’s have a debt in collections.
Further, with an average balance of over $5,000. You have a lot of company. And as such we’re going to cover the whole enchilada, and we need to start with your consumer rights.
Rights As a Consumer
Listen, there are rules. Specifically, the Fair Debt Collection Practices Act (FDCPA) is the federal legislation intended to regulate the industry. It’s worth reviewing in detail at your convenience.
In short, debt collectors and collection agencies must give you a modicum of dignity and respect. Further, they’re not supposed to call you before 8:00 am or after 9:00 pm unless otherwise agreed to.
They’re not supposed to use abusive or obscene language, harass you with repeated calls, call you at work if you asked them not to. They’re also not supposed to talk to anyone but you or your attorney about the debt.
Additionally, they’re not allowed to threaten a lawsuit, wage garnishment, asset seizure, unless they intend to do it. They’re supposed, to be honest, not misrepresent themselves, and be straightforward. There is more to the FDCPA.
Here’s the deal, the FDCPA is violated constantly. It’s debt collectors are one of the most common complaints at the Consumer Financial Protection Bureau (CFPB). Many debt collectors and collection agencies entire business models are in direct violation of federal law.
There are so many examples. And if you’re in an extreme case, and even modest cases, it’s possible you can be awarded monetary damages. We encourage you instead to take a more pragmatic approach, respectfully, because the debt collection industry has been booming, and it ain’t slowing down anytime soon.
Unfortunately, because even according to collection agencies CEO’s, this industry is notorious for being riddled with errors. If you feel your rights have been violated you may choose to report the debt collector to your state Attorney General, the CFPB, the Federal Trade Commission (FTC), and potentially even a private attorney.
On a sidebar, if you are in a place in your life where you just can’t handle debt collectors. We strongly encourage you to finish reading this article because it’s not as scary as it appears to be.
However, you can send a cease and desist letter to the debt collector. This is supposed to stop all future contact written, phone calls, electronic, everything. And restore some peace and harmony back to your day to day life, even temporarily.
Debt Collection Tactics
What can debt collectors and collection agencies legally do to collect payment for your account? Good question, and it’s a lot. Naturally, you’ll receive phone calls, letters, and they’re going to report negative information on your credit reports.
This is going to damage your credit score. If they’re unable to collect payment, they have two options. First, they can sell your account to yet another debt collector. This new collection agency will begin calling, sending letters, and they’ll report even more negative information on your credit reports.
And most common with unpaid debt in collections, it’ll be resolved with a civil lawsuit. As in a debt collector will sue you, in civil court. If this happens you’ll be notified with a summons. Please, show up. Even if you don’t have the financial wherewithal to make payment.
You see, most people don’t show up, and the collection agencies know this. That’s why in the overwhelming majority of cases they win a judgement by default. The judge doesn’t have a choice.
This is what debt collectors want, the judgement. Because this gives them much more aggressive methods to collect payment including wage garnishment, liens placed against you and or your property, and possibly even asset seizure.
Every state has unique laws, so investigate your local legislation for full details. Most shocking, in many of these collection agency lawsuits the case is won without the necessary supporting evidence, and only because the defendant doesn’t appear.
On a related note, as of July 1st, 2017 the credit bureaus have implemented new data standard requirements for all public records. This means, if you’re wondering how to remove judgements from credit report files, or how to remove public records from credit report files, it’s far easier to do today, than ever before.
As a result of these new data requirements. If we can avoid civil action, and not be sued, it’s best to do so. And if it’s unavoidable, please, take action to make sure you can be present for your day in court. And remember the burden of proof is on them, the plaintiff.
Does Paying Off Collections Improve Credit Score?
One of the most pressing questions is does paying off collections improve credit score? One would think, it’d make sense if it did, but it doesn’t. FICO says: “The fact that you have collections listed on your credit report will almost certainly lower your FICO score.”
The Experian credit bureau says: “Paying the debt won’t necessarily help your credit scores. Accounts that get to the collection stage are about as negative as it gets. Only bankruptcy is worse. As a result, any improvement, especially right away, probably will be very minor.”
The key to fix your credit score is to remove negative items from your credit reports. You see, these dings, blemishes, and negative marks are what’s damaging and dragging your credit score down.
So while it’s true, simply paying off debt in collections won’t directly improve your credit score. If you first perform the necessary due diligence, and follow our tips on paying off collections, it can be an effective way to remove negative items from your credit reports. And that will help with fixing credit.
How They Got Your Account Information
If your account is legitimate, the debt collectors got access to your account information and the collection rights to your debt, one of two ways. If it’s a more recent account, the collection agency, may be working on behalf of the original lender or creditor.
If this is the scenario, then it’s probably on a contingency basis. Meaning any money they collect will be shared between the collection agency and the original lender. This is important when we look at how to pay off collections.
The other method is the debt collector purchased the collection rights to your account, from yet another collection agency. This is done with what’s called buying debt portfolios. It’s essentially packages of consumer debt, and it sells for pennies on the dollar.
On top of all this, collection agencies can charge astronomical fees and continuing interest rates. One of our members recently reached out to us, where a collection agency charged him over $25,000 in fees and interest overnight, on a roughly $50,000 student loan debt. Absurd!
How To Negotiate With Debt Collectors
1. Request Account Validation
The very first step for all consumers, dealing with debt collectors, is to first request debt validation on your alleged account. This is your right, granted by the FDCPA. This request is most effective when made in writing with a debt validation letter, and sent certified mail, with return receipt requested.
This way you’ll have evidence they received your validation request. This is important for a number of reasons, but especially if you’re unable to identify the debt. It’s not like you did business with this collection agency directly, they came looking for you, so they need to show us who they are.
You see, they’re required to respond to your validation request within 30 days, by providing you with paperwork, documents, and evidence. This paperwork should prove it’s legit, along with who the original creditor was, the dates of account activity, the total balance, etc.
If they fail to validate your account, then it’s legally forgiven. As in you’re no longer legally responsible for repayment. Further, they’re supposed to notify all three credit bureaus to have them get collections removed from credit report files, regarding this debt.
You’ll frequently see either from the collection agency itself in their communications, or online about how you only have a short window to request validation of your debt, such as 30 days. This is true, however, every legitimate collection agency will validate your debt at virtually any time.
Their goal is to get money from you. And if validation of your account is what you need, in order to potentially pay off a debt in collections, they’ll do it, anytime. Even in legal civil cases, they first have to prove the debt.
2. Statute of Limitations
If they do validate your account, then our next step is to review this paperwork in detail. We’re looking for your date of last account activity. Because you’re not legally responsible for repayment forever. This is called the statute of limitations.
This is the legal time window for which we are responsible for repayment. And this law is unique to each state, and does vary, so for full details investigate your local legislation. Generally, this time window is about seven years from the first date of delinquency.
As in seven years from the first missed payment, and frequently this occurs with the original lender or creditor. You see, once this time window expires, so does our legal obligation for repayment of this debt. I’m not talking about ethical, moral, or any other holy subject. Only your legal responsibility.
This legislation applies to most types of consumer debt including healthcare, charge off debt, retail, utilities, loans, credit cards, telecommunications, and many more. The few exceptions include federal defaulted student loans, and federal income taxes.
Warning. One of the dirty debt collection industry tactics is to re-age consumer accounts. Often this is done illegally. If you notice on every phone call, they first want you to identify yourself and confirm personal information.
This is used by what they’d say to ensure they’re speaking to the right person. And that may be true. But, it’s also frequently used and viewed as account activity, the simple recognition of the debt. And thus, re-ages your account for another potentially seven years.
This is one reason why it’s always best to only communicate in the written form, with debt collectors. It’s a bit, like being arrested by the police, you can only say things that will be used against you. You won’t be able to convince them of your innocence.
If your account is expired under the statute of limitations, this would be your defense in a civil case. Your welcome to share that information with the collection agency, but it most cases, you’ll still need to send a cease and desist letter.
3. Negotiate a Settlement Agreement
Now let’s get to how to pay off collections debt. And the first place, is always negotiating with debt collectors, to pay off your debt for just a fraction of the balance. Typically you’ll be able to settle your debt for as little as 15% up to 45% of the total balance.
For example with an $800 debt, you may be able to settle for just 25% or $200. This is in part because your balance is likely inflated with collection fees, and a sky-high interest rate. Debt collectors are very happy to accept a settlement for less, and this is standard operating procedure.
The second part of your agreement is mission critical. You must get this collection agency to agree that in exchange for your payment, they’ll stop reporting your account information to all three credit bureaus.
If you overlook this part, once you make payment, the only change that will happen is to the status of the collection on your credit report. It’ll be changed to a paid collection and this is still a negative item that’s going to damage your credit score.
It’s best to get this agreement in writing. We also encourage you to add in a memo line of a personal check with payment, something about their agreement to stop reporting your account information to the credit bureaus. This is added insurance.
When they deposit and cash your check, this will constitute a legal contract. And this is evidence that’s admissible in court. Keep in mind, you and the debt collectors, by default, have an adversarial relationship.
The debt collectors want to get money out of you. And many collection agencies including their staff work on commissions. Thus, they’re very willing to settle for less, and they’ll agree to stop reporting your account information, so you can repair credit.
We’d be remiss, if we didn’t warn you, about the internet folklore of a pay for delete method of dealing with debt collectors. If you haven’t yet seen this bogus claim, the idea is when you’re negotiating a settlement, you demand the collection agency delete the item from your credit reports.
You’re welcome to try this approach. We’ve yet to hear of one debt collector agreeing to do it, and this is because of a variety of reasons. First, it sets a dangerous precedent, they’d have to do it for everyone.
Second, if requires placing blind faith trust in you, or you in them. They’re contacting you based on a broken agreement, and they’re not going to be willing to blindly trust you to pay them, after they delete the item. No more than you should blindly trust them to delete the item, after you pay them.
And plenty more reasons, but we haven’t heard of anyone being able to actually use this wonderful sounding pay for delete model. Instead, it’s most effective to simply get them to agree to stop reporting your account information, and then we can clear credit report dings.
4. How To Remove Collections From Credit Report
As we shared the most effective way to fix bad credit, is to remove the negative, derogatory, damaging items from your credit reports. This is what’s pulling down your credit score. Specifically, we’re looking at how to dispute credit report items.
This is how you challenge an item on your credit reports, and any item that you believe is made in error, misleading, or incorrect. This is your right granted by the Fair Credit Reporting Act (FCRA). And we’re going to dispute the collection item.
You can file your dispute online, over the phone, or by mail. Once the credit bureaus get your dispute, and deem it valid, they’re required to investigate the item. They call it a re-investigation, under the idea there was an investigation before the item was put on your credit report.
Nevertheless, when they re-investigate they’ll contact the debt collector for verification of the account. As per your settlement agreement the collection agency won’t verify your account during the credit bureau re-investigation.
The FCRA, says any item that can’t be verified must be removed from your credit reports. This is how to remove collections from credit report, and do so legally. This is an effective method of removing paid collections and any other credit report dings, using the dispute process.
Look, it’s virtually guaranteed that your consumer rights have been violated, that’s the truth. You can take action and report these companies to the authorities. You can file lawsuits and potentially be awarded damages. You can be sued too. And the best way to handle debt collectors is to relax, and take a pragmatic approach.
If this is a legit debt, then we’ll take the appropriate, and wise action. And it’s best if you use the steps in this article to make sure you will benefit and clear credit file dings if you choose to pay off debt in collections.
When all is said and done, your credit score is just like your Grade Point Average (GPA) in school days bygone. It doesn’t matter if you’re acing all your courses, if you’re failing The Art of Walking, a real college course by the way.
Because this one negative mark is going to ruin your overall GPA. This is also true of your credit score. FICO is very open and clear about this. And this is why it’s so important to clean credit history dings, blemishes, and remove negative items.
We encourage our members to consider professional, legal, and legitimate credit repair companies to help. Because in 2016 alone, over 9 million negative items were removed from consumer’s credit reports.
One of the best credit repair firms is The Credit Pros. They’ve helped client’s remove collections, late payments, charge offs, judgements, liens, and many more negative credit report items. For full details check out our Credit Pros review article.
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