Collection agencies exist because businesses cannot let “bad” debt linger on their books for longer than ~180 days. By letting a bill go overdue for this long, you run the risk of your creditor either assigning or selling your debt to a collection agency/debt collector. Before jumping into it, it’s important to know that there is an important difference in how debt is handled if it is assigned or sold:
Assigned Debt – Debt that is transferred to a collection agent in order for them to work on getting you to pay. Your original creditor (OC) still owns the debt and the collection agency will receive a percentage of whatever they get you to pay.
Sold Debt – This is debt that has been sold to a debt collector who now legally owns your debt. You now owe nothing to the original creditor but you are still liable for the debt under the terms of the contract you had with the OC. Debt collectors usually buy debt at a deep discount and get to keep everything they get you to pay.
So let’s say you get a letter in the mail/phone call one day from a collection agency saying you owe them money. What’s your best course of action?
- Call the original creditor – Maybe you let your final utility bill from your old apartment/house go unpaid, which is a relatively common occurrence for debt collectors, you need to give that utility company a call immediately. Their representative can tell you whether or not the communication you received was legitimate (if they did sell or transfer the debt) and what needs to be done in regards to paying it. In most cases, they are going to tell you to pay the debt collector whether it was sold or transferred. Don’t acknowledge the debt is yours, just say you’d like information about who holds it. It doesn’t hurt to ask if they can pull the debt back from the collector if it has been assigned. It’s always best to pay your original creditor, preventing a collection agency from touching your credit report, and keeping the debt as being reported as “charged-off”.
- Collection agencies that call you before any other contact is made are required by the Fair Debt Collection Practices Act (FDCPA) to send you a letter within five days of that initial phone call. The letter needs to have some basic information regarding the debt and who owns it, as well as a notice about your rights as a consumer. Assuming the debt collector has your correct address, you should receive the letter within about a week. If they do not have your correct address, and your mail isn’t being forwarded, you may never get the letter. Collection agencies can send their notice to your last known address and be alright under the FDCPA. Living at the same address for a long time and not receiving the letter is a violation and you can claim up to $1,000 for it. (More on that later)
- When you do receive their notice in the mail, it should have information on it regarding what needs to be done if you dispute the validity of the debt (if it is just a letter saying how much you owe and giving you options to pay, with nothing else, that’s an FDCPA violation). Within 30 days of receiving the letter, you will need to write to them requiring them to validate your debt. These are some good examples of debt validation letter templateswhich cover all of your bases. It is best if you send your letter via certified mail with a return receipt requestedfrom the receiver. This acts as proof that they got your validation letter.
- When they get your validation letter they must immediately stop trying to collect from you until they send you validation paperwork. This means all phone calls must stop, lawsuits must stop, letters must stop, everything must stop EXCEPT they can still update your credit report (there is a caveat here as well). Receiving a letter that was already in the mail by the time they got your validation request does not go against the FDCPA but you don’t have to respond to it. A popular misconception about debt validation is that because you have 30 days to dispute the debt, they have 30 days to respond to it. This is untrue (except in Texas where state law DOES mandate they have 30 days to validate your debt), they can take as long as they want to validate it, provided they do not attempt to collect in the meantime.
- Perhaps you receive a letter in the mail validating the debt, this lets them restart their attempts to collect from you. They might try calling but if you want, you can withdraw your consent for them to call at anytime. The best way to do this is to either tell them all calls are inconvenient for you when you send the debt validation letter or in a separate letter after you receive validation. Calling you (more than once) after you revoke consent puts them in violation of the FDCPA and Telephone Consumer Protection Act (TCPA)
- They’ve validated the debt, you know where the debt is from, you just want it to be off of your credit report. Your first option is to obtain a Pay-for-Delete agreement with the debt collector. In order for this to work, you’ll usually have to make a payment in full, possibly that day but for sure within a short amount of time. This used to be a popular option if you owed money to a collection agency since they would normally be happy to get paid and remove the information. In the past couple of years, credit reporting agencies have clamped down on the practice since it makes their reports “less accurate”. Now, if a certain company starts putting in too many requests to remove an account, they will be flagged for a review. If the credit bureau finds that they are basically agreeing to everyone who wants to pay for a delete, the bureau will stop that company from reporting to them, depriving the collection agency of a very powerful tool to help them collect. Experian and Transunion are much more strict with collection agencies than Equifax, which is why you sometimes see a collection account on only one credit report (usually Equifax). At least you know if you only see the account on one bureau’s report, there is a good chance a Pay-for-Delete agreement will work.
- Collection agencies will usually let you setup a payment plan to let you pay off your debt over time. After you make the last payment, you will want to get something from them which shows that you have paid what you owed. You can also negotiate how much you’re willing to pay a collection agency, though this works better if you can afford to make a lump sum payment that day. Some agencies or creditors will forgive a certain amount of debt, but if it ends up forgiving more than $600, they will likely give you a 1099-C tax form for the amount that was forgiven. This will count as income for tax purposes.
- For debts deemed big enough, there is a chance that the debt collector will sue you. This usually only happens either with very large debts, or if a big debt collector holds your account and you live in an area with many other account owners. You’re probably safe from a lawsuit if you owe $300 and live in an extremely rural area, but you may be at a much higher risk of a suit if you owe $5,000 and live in Los Angeles. If you get served papers, SHOW UP TO COURT, do not let them get a default judgement against you. You can often talk with the attorney to work out a payment plan, or you can attempt to fight the lawsuit. (More on this later)
- Having a ton of debt and few assets may make bankruptcy your best bet. This is basically the nuclear option since it can wipe out all of your dischargeable debt (not student loans) but you are going to look super-risky to lenders for the next couple of years. If there are no major purchases (house or car) in the near future, it may be worth looking into. Forgiven debt under a bankruptcy is not counted against you as income under bankruptcy. Chapter 13 bankruptcy reorganizes your debt while and lets you keep most assets while Chapter 7 lets a trustee sell non-exempt assets but wipes debt away completely.
- After seven years (7 years, 6 months in practice, but it depends on the state) from the date of the first delinquency, credit reporting bureaus must remove bad information about you from their reports. At the same time, if you dispute a debt with a credit bureau and they receive no response from the business listed on the account for 30 days, they must remove it from your credit report. Some states have laws that get bad marks off of your credit faster but federal law says seven years. Shady collection agencies might try to tell the credit bureaus that you “made a payment” or “acknowledged the debt”, which will restart the ~7 year waiting period. This is a violation of the Fair Credit Reporting Act (FCRA) and you can collect awards from debt collectors and credit report bureaus breaking this, as well as the FDCPA and TCRA.
It’s sometimes best to wait out the statute of limitations, especially around the 5-6+ year mark if you don’t have any big purchases in the pipeline. What that isn’t feasible, after a couple of years, the impact that negative information has on your report does start to drop off by quite a bit. It’s why you won’t see your credit score rise much, if at all, by having a 7 year old collections debt fall off as opposed to getting a 6 month old collections account deleted.