Getting an avalanche of phone calls? Threatening letters? If so, you’re in the right place because in this article we’ll be sharing all the ins and outs of exactly how to negotiate with debt collectors, and dealing with collection agencies.
Obviously, if it’s possible to avoid having your account sent to collections, that’s best. However, for our purposes, we’re specifically discussing how to deal with debt in collections. In other words, accounts that are with collection agencies, not still held by the original creditor or lender.
The first item on our agenda is the Fair Debt Collection Practices Act (FDCPA). This is federal legislation that regulates the debt collection industry. Yes, they have rules they’re at least supposed to follow. It’s worth checking out the FDCPA in detail, at your convenience.
In short, this law says what time of day collection agencies can call you, who they can discuss your debt with, it further is supposed to prevent them from using abusive or obscene language, threaten legal action unless they fully intend to use it, and so much more. They’re supposed to be upfront, honest, and not use deceptive tactics. Along with giving you the modicum of respect and dignity, every human being deserves.
Warning. This legislation is violated every year, evidenced by the continuous fines from our government, and that’s only to the companies that were caught. The debt collection industry is akin to the Wild West.
Does Paying Off Collections Help Credit?
Look, many people will instinctively go and pay off debt in collections, and without doing the proper due diligence first. It gets worse, because many of these well-intended folks expect to see their credit score improve as a result, and are horrified when it stays the same or worse drops.
You see, the only thing that happens when you pay off collections, and nothing more, is the status of the item on your credit reports is changed. It’s changed to a paid collection. This is still a negative, damaging, and derogatory item.
It’s virtually guaranteed to lower your credit score. FICO says: “The fact that you have collections listed on your credit report will almost certainly lower your FICO score.” Anthony Sprauve, a spokesman for FICO, says collections listed on your credit report can damage and drag your credit score down, by as much as 100 points.
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.”
Pretty conclusive, huh? Listen, the key to fix credit score information is to remove the negative items from your credit reports. For some folks, after first performing the necessary due diligence and following the remaining suggestions in this article, may discover paying off collections is the best, fastest, and most effective way to clean up credit report dings, blemishes, and remove negative items.
Debt Collection Weapons
We first need to share how your account ended up with a debt collector, and the legal tools they have to use against you to attempt to collect payment. Chances are, this all started with your original creditor or lender after about six months of delinquency, they probably charged off your account.
This is when the debt was sent, sold, or assigned to a collection agency. There’s two ways debt collectors earn revenue from your account, they’ll either work on a consignment basis. This is just like commissions, any revenue collected will be shared between the debt collector and the original lender.
Alternatively, they could be what the industry terms a “late-stage” collection agency. These debt collectors buy what’s called debt portfolios. Which is simply a package of many debt accounts. They buy these “junk debts” from other collection agencies.
These are non-performing accounts. In other words, debts that earlier collection agencies were unable to collect payment on. And if you’re dealing with late-stage debt collectors, you’re literally swimming with sharks and there’s blood in the water. These guys are extremely aggressive.
When your account is sent to collections, in addition to the original creditor or lender reporting a charge off account on your credit reports, the collection agency will also report more negative information on your credit reports. Along with calling you, sending letters, and they can also inflate your total balance with interest fees, and even collection fees.
If they’re unable to collect payment, as we mentioned, they’ll package your account into a debt portfolio and sell the rights to it, to yet another collection agency. This new collection agency will begin calling you, sending letters, and they’ll report even more negative information on your credit reports.
The other option and the most common result of unpaid debt in collections is a civil lawsuit. As in you’ll be sued for repayment. Late stage debt collectors use this collection method with regularity. Their goal is to win a judgement against you.
Because if this happens, they’ve got you by the short and curlies, and many more collection methods at their disposal. Depending on where you live, because every state has unique laws, so for full details investigate your local legislation. This can lead to wage garnishment, liens placed against you and or your property, and even asset seizure.
Not to mention a credit judgement will absolutely annihilate your credit score. Knock on wood, there is a glimmer of good news if you have a judgement against you. On July 1st, 2017 all three credit bureaus implemented new data standard requirements concerning public records on credit report files.
This is judgements, bankruptcies, foreclosures, wage garnishments, and tax liens. In short, these new data standard requirements are requiring a modicum of information, which most public records don’t contain. As such, if you’re wondering how to remove judgements from credit report files, or remove public records from credit report files, you’re chances today are way better than any day in the past.
How To Pay Off Debt Collectors
1. Request Account Validation
Let’s talk about how to pay off debt collectors, and so it will improve your credit score. The very first step for all consumers dealing with debt collectors is to first request debt validation on your alleged account. This is your consumer right granted by the FDCPA.
It’s best to make your request in writing and send it using certified mail. This way you’ll have evidence they received your request. Essentially, when we request debt validation on your account, we’re saying debt collector you first prove this is actually my debt, and then we can potentially discuss repayment.
After all, it’s not as if we did any business directly with this collection agency. This is part of the due diligence, because they’re required to respond within 30 days of receipt. They’re required to provide us with the documents, evidence, and paperwork proving this is our account. This paperwork will also contain the details about the debt such as who the original creditor was, the total balance, date of account activity, etc.
If they fail to validate your account, for any reason, then in compliance with the FDCPA the debt is legally forgiven. In other words, you’re no longer legally responsible for repayment. Moreover, they’re supposed to contact all three credit bureaus to have them get collections removed from credit report files, concerning this account.
2. Statute of Limitations
If your account is validated, we next need to review this paperwork they send. We’re looking for your last dates of account activity. You see, you’re not legally responsible for repayment for most types of consumer debt, forever.
This is a state law, called the statute of limitations, and it says exactly how many years you are legally responsible for repayment. It does vary by state, so for full details, check out your local legislation. Generally, it’s about seven years from the first date of delinquency.
Once this time window expires, then the debt is legally forgiven. This state legislation applies to medical bill collections, charge off debt, telecommunications, retail, utilities, credit cards, and so many more types of consumer debt. The few exemptions include federal income tax, and defaulted federal student loans.
Caution. One of the most common fines issued to the debt collection industry is for illegally re-aging consumer accounts. For obvious reasons, it allows them to continue to attempt to collect payment. Our point is simply, it’s naive to believe any debt collectors are sitting around just waiting to forgive anyone’s debt.
3. How To Negotiate a Settlement Agreement
If your account is validated, and within the statute of limitations time window, our next step is talking about exactly how to negotiate a settlement agreement directly with debt collectors. There’s two important pieces of your agreement, and it’s wise to get this in writing.
First, always negotiate to pay off debt collectors, for less than the total balance due. As we shared, it’s likely your total balance has been greatly inflated due to high-interest rate fees, or collection fees. For instance, one of our members recently shared with us how he was charged almost $25,000 in collection fees on a $50,000 student loan in default. Crazy!
The point is you can always negotiate to settle for less. Debt collectors anticipate and expect a settlement for less. This is part and parcel of the process of paying off debt collectors. The exact amount will depend on the age of your debt, along with the type of debt.
Frequently, you’ll be able to settle for as little as 15% up to around 45% of the total balance. For example, with a $1,000 debt, you may be able to settle for just 25% or $250. But wait, before paying off debt in collections, the second part of our agreement is mission critical.
We must get the collection agency to agree that in exchange for our payment, they’ll stop reporting our account information to all three credit bureaus. If we neglect this part of our agreement, then we’ll get stuck with that paid collection on our credit reports.
Have you heard about the pay for delete approach for negotiating with debt collectors? This is a very popular internet method of dealing with collection agencies where we demand they first delete the negative item from our credit reports, and then we make payment.
It sounds terrific. However, it’s totally wishful thinking. Unfortunately. You’re welcome to try this approach, but in our decade-plus experience of personally working with folks to fix credit, we’ve yet to hear of one instance where this truly happened. It’d be great, if it did work that way.
Instead, it’s best to request they simply stop reporting your account information to the credit bureaus, in exchange for your payment. They will agree to this. Maybe reluctantly, hopefully immediately, but if they give you any grief it’s only temporary, so long as you stay tough. And now let’s see why this part of your agreement is so important.
4. How To Remove Collections From Credit Report
Let’s now talk about how to remove collections from credit report, because we know this ding on our credit reports, is damaging and dragging our credit score down. To do this, we’ll need to dispute credit report items, and this requires us to exercise more of your consumer rights, and specifically those granted by the Fair Credit Reporting Act (FCRA).
This federal legislation is what enables us to challenge and dispute any item on our credit reports. And yes, we’re going to dispute the collection item. There’s three ways to file your credit report dispute: online, over the phone, and by mail.
Once the credit bureaus get your dispute, and find it valid, which is another conversation for another time and place. So make sure to sign up for our free newsletter for more about tips about how to get your credit score up with Dan Willis, and join our congregation.
Once the credit bureaus get your dispute and find it valid, they’re required to investigate the item. They call it a re-investigation, nevertheless, they’ll contact the debt collector for verification of the account. As per your settlement agreement, the debt collector won’t verify your account during the credit bureau re-investigation.
This means, to comply with the FCRA, the credit bureaus must remove this item from your credit reports. This is how to clean up credit report dings, blemishes, and remove negative items. And do so legally, by exercising your consumer rights under federal and state legislation.
The challenge for most folks comes in getting the credit bureaus to deem your dispute valid, and actually, conduct their re-investigation. Many of these investigations, result in items not being verified, and subsequently removed.
The reason it’s so challenging for folks to get the credit bureaus to investigate their disputes, is because this is only an expense. The money the credit bureaus spend investigating consumer disputes, is very directly otherwise profit and returns paid to stockholders.
The credit bureaus are private for-profit businesses, just like your local grocery store, or gas station. The only reason they do investigate consumer disputes is because federal law requires it, and that’s debatable. Because in the 40 plus years, the FCRA has been on the books, the credit bureaus have been fined repeatedly.
They’ve been fined by our government, time and again. Both the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB). In addition, to countless individual consumer lawsuits, and in just 2015 all three credit bureaus collectively agreed to pay and settle with 31 state attorney generals for allegedly violating consumer rights.
It was alleged the credit bureaus were just ignoring consumer disputes. In fact, 60 Minutes in recent years aired an episode featuring this story. And in 2013 this happened to a woman, named Julie Miller.
You see, the most likely response to your credit report dispute, is the credit bureaus will claim your dispute is frivolous and they’ll request more information. This is a stall tactic, used in hopes of frustrating you, with the goal of you just giving up and going away.
And most people do. However for folks like Julie Miller who woke up one day to discover 38 collection accounts were in error being reported on her Equifax credit report. Obviously, destroying her otherwise excellent credit score.
She did what she was supposed to under federal law and the FCRA, and disputed this error on her Equifax credit report. During the next two years, Equifax repeatedly found Julie’s dispute frivolous and asked her to send more information. She did, she sent them W-2’s, pay-stubs, utility bills, DNA, hair samples, and her firstborn child.
All to no avail. Yes, that is a small exaggeration. Nonetheless, after two years on a very valid and legitimate dispute and Julie was still getting the runaround, she had enough, and filed a civil lawsuit against Equifax. And won.
She was awarded $18.6 million by a federal jury. This was later reduced to $1.8 million by a federal judge. Here’s the kicker, Julie’s compensatory damages even after the reduction we’re for only $180,000. This is the money awarded in actual life damages, intended to make you whole again.
The punitive damages, even after the reduction was for $1,620,000. In other words, even a federal judge found Equifax’s behavior so reckless, irresponsible, and aggravating that Julie was given nine-times her compensatory damages, just for the annoyance. And hopefully to send a message to the other two credit bureaus.
Listen, you’re going to war when negotiating with debt collectors and dealing with collection agencies. That’s before you even consider the three major credit bureaus, and their endless resources. You can improve credit and long before the maximum seven years, slowly tick by.
If O.J. can get early release from real prison, we’re confident with assertive, and wise deployment and the willingness to exercise your consumer rights, you too can get out of bad credit prison before the maximum seven years. Did you know there is no minimum amount of time any negative item must remain on our credit reports?
It’s true. When all is said and done, your credit score is a lot like your Grade Point Average (GPA) in school days bygone. It doesn’t matter if you’re acing all your classes, if you’re failing The Art of Walking, because this negative mark is going to ruin your overall GPA.
This is also true of your credit score. It’s why it’s of such paramount importance to clean up your credit and remove the dings, blemishes, and 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 successfully remove late payments, collections, charge offs, judgements, liens, and so many more negative credit report items.
Get a free credit consultation with a certified FICO professional by calling toll-free 1-877-418-7596. And for more tips, techniques, and strategies about how to improve my credit score with Dan Willis, sign up for our free newsletter and join our congregation.
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