Saturday, July 31, 2010

Collections On Your Credit Report

Collections on your credit report can trip you up financially and decimate your credit rating. Unfortunately, collection agencies are notorious for making illegal false reports to the credit bureaus. Review your credit report regularly to make sure you aren't the victim of any of these dirty tricks:

Reporting Incorrect Dates

Collections on a credit report that reflect incorrect dates are by far one of the most common credit reporting errors most debtors will ever encounter. If you have a collection account on file with the credit bureaus, its more likely to reflect incorrect dates than correct dates. Here's why:

They know the correct dates. Do you?

You're more likely to pay a collection account if it appears on your credit report. Not only do some lenders require borrowers to pay off any outstanding debts they carry before being approved for a loan (think, mortgage), but the vast majority of unsuspecting consumers just assume that, as soon as they pay off the debt, the collection account will vanish from their credit report. Wrong. Wrong. Wrong. 

Per federal law, collections on your credit report can only remain there for 7 1/2 years after the day you stopped paying the original creditor. Original creditors usually don't sell debts to collection agencies until they're six months delinquent. Once the collection agency gets hold of the debt, it must give you 30 days to dispute the debt's validity. Thus, most collection accounts will only stay on your credit report for a total of 6 years and 11 months. 

The Fair Credit Reporting Act requires all business that participate in credit reporting to report the correct dates on all accounts. These dates are what instruct the credit bureaus' automated systems to remove the tradelines after the appropriate time period. The longer a collection account stays on your credit report, the more likely you are to make a big purchase with a lender that requires you to pay it off before lending to you. Thus, some collection agencies alter the dates on their reports to ensure that the collection account taints your credit file indefinitely. 

Reporting Your Collection Account As an Installment Account

No one knows the credit scoring formula FICO uses, although we do know the weight certain aspects of a credit report carry in the credit scoring formula. The types of debt you carry account for 10% of your credit score. The types of accounts that can appear on your credit report are as follows:

1. Revolving Accounts – credit cards, department store cards, HELOCs

2. Installment Accounts – mortgages, student loans, auto loans

3. Adverse Accounts – Reserved for collection accounts

Public records show up too, but that's a lesson for another day. Anyway, these three types of accounts make up that 10%, but like any credit repair specialist with enough experience will tell you, they don't all factor in equally

Collections reporting as installment accounts may hurt you even worse.

We have no way of knowing the exact formula, true, all any of us have to go on is experimentation and experience, but installment accounts appear to carry a greater weight when determining a credit score than revolving accounts do. Miss your credit card payment? ouch. Miss your mortgage payment? Bigger ouch. You get the picture. 

So, some collection agencies like to stick their reports into the "installment accounts" section of your credit report along with the section reserved expressly for old debts. Not only is double-reporting a big no no, but this all but guarantees that any lender you apply for a loan with will see the debt, since lenders place a considerable emphasis on your past history managing installment debts. When the lender sees the debt, guess who's going to have to pay it off before getting the loan? 

Not Updating Paid Collections

If you had collections on your credit report previously and paid them off, the accounts should reflect a status of "paid". ("Settled" if you paid less than the full balance). Although this does NOT in any way influence your credit score, it does impact the way creditors, insurance companies and employers who pull your credit reports view you. Having a collection account on your credit report is bad, but having one that's paid at least demonstrates that you're somewhat responsible (although I still strongly recommend not paying most collection accounts).

Lenders may not know your collection account was paid.

Of course, after the company gets the money, they have little incentive to correctly update your credit reports. Sure, the FCRA entitles you to a fair and accurate credit report, but getting a collection agency to acknowledge that is like trying to teach algebra to your child: It'll get through eventually, but its one hell of a headache until it does. The simple truth of the matter is that the collection agency doesn't care anymore what happens to you or your credit. The truly dastardly ones will then sell the debt, in its entirety, to a junk debt buyer after you've paid it in full. 

The bottom line is this: If you have collections on your credit report, check them carefully as they may very well contain intentional credit reporting errors designed to force you into paying an old debt. 

The Difference Between Junk Debt Buyers and Collection Agencies

All junk debt buyers are collection agencies, but not all collection agencies are junk debt buyers.

Let me explain. 

When your creditor turns your debt over to a collection agency, nine times out of ten it sells the debt. In some cases, it outsources the debt and pays the debt collector a percentage of the recovered amount, but that is no longer a common practice. 

The collection agency will then go to work trying to collect the debt. It will try...and try....and try. Sometimes this process goes on for years. Phone calls, settlement letters, phony threats to sue...blah blah blah. Somewhere along the way the company will give up and you'll hear from them less and less. Eventually, they'll stop contacting you....but you aren't out of the woods yet. 

Enter...the junk debt buyer (I want you to mentally play some scary sound effects in your head right about now).

Here come the junk debt buyers!

Surprised? Don't be. The collection agency didn't forget about you. Not by a long shot. Businesses know when to cut their losses and you just got cut. 

When a collection agency decides that an individual costs it more to track down, call and send letters to than its ever going to recover, and a lawsuit isn't an option due to an expired statute of limitations or the person's judgement proof status, they sell the account to a junk debt buyer. 

Junk debt buying is a much seedier industry than run-of-the-mill collecting, if that's even possible. While collection agencies will pay a percentage of the total debt when they purchase it from the original creditor, junk debt buyers pay mere pennies to claim ownership of your account. They're also far less likely to bother following federal laws that protect debtors' rights. 

Debt Recovery Cleans Up Its Act

Once upon a time, all collection agencies harassed debtors using threats, swear words and intimidation. It was an industry standard. Believe it or not, over the past ten years that practice has died down quite a bit. Around 2001 the FTC decided to start enforcing the consumer protection laws that govern debt recovery and credit reporting. Around the same time, a consumer information movement was spawned and forums everywhere exploded with various techniques for going on the offensive and dragging collection agencies to court. 

The end result of all this is that many (note that I say "many" and not "all") companies dedicated solely to debt recovery starting training their agents better regarding how to avoid getting the company into deep water legally. Thus, collection agencies still break the law, but not nearly as blatantly as they once did. 

Collection agencies don't want to get sued.

Why Junk Debt Buyers Break the Law

Junk debt buyers don't get their grubby little paws on unpaid consumer accounts until after the collection agencies deem the debts worthless. If a collection agency considers your debt worthless, you can pretty much rest assured that it is. 

A representative will then call you asking for payment. He's unlikely to harass you or utilize any other sort of illegal tactic. This is the first call and he's feeling you out. You see, the junk debt buying company knows that, if you're well-informed of your rights, you'll tell that representative all the reasons why the debt is uncollectable and you cannot be contacted and so on and so forth. If you stammer around a bit, claim you don't know anything about the debt, promise to pay, apologize, etc., they know you know absolutely nothing of your rights and they have you over a barrel. At that point, the real harassment begins. You won't sue them, because you don't know that they're even breaking the law. The goal is simply to harass and frighten you into doing one of two things.

1. Paying up – either via settlement or in full.

2. Resetting the statute of limitations 

Don't get me wrong, collection agencies have the exact same goal and many use almost identical tactics to achieve it. There are, however, a few major differences:

1. Collection agencies often still have the right to file a lawsuit. Thus, their threats are only illegal if they don't intend to follow through. Most don't, but since they have the right to do so, you can't prove that. 

2. Junk debt buyers often have NO documentation of the debt at all. NONE. ZIP. ZILCH. ZERO. Collection agencies may have records, depending on who the original creditor is, but junk debt buyers almost never do. No records = no debt validation. 

3. Companies that purchase junk debts are lower budget operations. Their collection success rate is lower than that of the companies that purchase fresh debts. These aren't the people who buy their debts from Citibank. These are the people who buy their debts from the people who buy their debts from those that originally purchased the overdue accounts from Citibank. Convoluted? You bet. 

4. If you don't pay, a junk debt buyer has no option other than to break the law and harass the hell out of you. It can't sue you; the account is too old. It can't take a tax loss like a normal collection agency (ok, it could, but a tax loss of a few cents? C'mon) and there just isn't anybody else to sell the debt to that would give the company even a shred of profit. 

There you have it. This information is important as occasionally (not often, but sometimes) fighting tactics differ depending on which tier of this dirty little system you're dealing with. Regardless of what you may hear or see while perusing the web, now you know the actual difference between a collection agency and a junk debt buyer.

Fighting Collection Agencies

If you, like so many Americans, are fighting collection agencies and suffering from undue emotional and financial hardships as a result of collector harassment, take heart – you hold the cards. No, I'm not trying to sell you anything. What I want to do is give you the information you need to fight the good fight and demonstrate to the debt collectors hot on your tail that they need to find easier prey.

As a professional, its incredibly disheartening to stumble upon websites that claim to offer valuable advice on how to fight collection agency debt yet instead instruct readers to do things that will either make the situation worse or get them sued. Granted, risks are an inherent part of this industry, and some methods are riskier than others, but consumers deserve to know just what they're up against with certain debt avoidance tactics.

Before we Begin: The Disclaimer

I am not an attorney. I am a consumer advocate and a credit specialist. The information I provide is not to be considered legal advice nor do you and I share any variety of attorney-client privilege . My posts are a compilations of years of experience and a nose-to-the-grindstone study of the law. Anything you choose to do, you must do at your own risk (but I promise to explain those risks to the very best of my ability).

What Is Collection Agency Debt?

Collection agency debt is any financial obligation owned by a collection agency. Don't get these companies confused with collection departments. They are very different beasts. I will explain the difference in a later post. As a general rule, if you're getting telephone calls and letters concerning a debt you haven't paid in over six months, you're dealing with a collection agency.

Collection agencies buy debts from hospitals, credit card companies, utility companies, mortgage companies and rent-to-own facilities for much less than the debtor actually owes...much, much, much less. The company then adds some outrageous fees and goes after the debtor for the balance. The majority of these agencies will continue to add "late fees" (yes, I'm laughing) and interest to your debt so that they can eventually offer you a settlement and make it appear to be a good deal. Thus, your unpaid debt increases for a while before sharply declining.

While all this is going on behind the scenes, you're getting inundated with phone calls and letters from debt collectors trying to extract even the smallest payment from you. Paying even a penny, however, is usually one of the worst mistakes you can make when fighting collection agency debt. Don't do it!

Fight The Debt Collectors 

Luckily, you have a plethora of consumer protection laws backing you up. No matter how you may have criticized your government in the past (and lets face it, we all have) they've done some real stand-up stuff for you in this area. Your job now is to take advantage of the numerous protections that are in place (and yes, a few of the loopholes) in order to escape the situation you're currently in without having to work yet another debt payment into your already strained financial budget. I'm going to show you how to do that.

Not only do I hope to teach you the skills you need to start fighting collection agency debt and breathe easy once again, I hope that you'll take this information with you and inform others so that they too can remove the noose and get their lives back.