Thursday, December 22, 2011

What To Do When a Collection Agency Validates Your Debt

We've discussed in depth what a debt validation is and why its crucially important to fire one off the second you hear from a collection agency. In a previous post I mentioned that I would discuss what to do if a collection agency responds to your debt validation letter. One of my readers has been kind enough to point out that I never did that. Sorry guys. Let's take care of that now.

Responding to a Debt Validation Letter

Over the past 10 years or so, consumers have become much better informed about their rights against bill collectors. While its always a good thing for consumers to know and defend their rights, it started costing the collection industry big bucks when every Joe Schmo out there sent a validation letter as soon as the collector contacted him.

The answer to this ever-growing problem was automated validations (You had to see that one coming). Not all collection agencies use a computer program to churn out automated debt validations, but many do. The goal of this, of course, isn't to actually follow the letter of the law and validate the legitimacy of your debt. The goal is to make you give up, tuck your tail between your legs and trudge to the bank to pay off the account.

But we aren't going to do that are we? Didn't think so.

The Automated Debt Validation Letter

The automated debt validation response that you're likely to receive from a collection agency isn't going to give you any details. As a matter of fact, it isn't going to give you much of anything other than how much you owe – a fact any debt collector would have been more than happy to scream at you over the phone. Let's look at an example of the typical automated debt validation response for a defaulted credit card debt, shall we?

Mr. Doe:

Our records indicate that you requested a debt validation on 01/01/2012. Per our records, the amount you owe is $xxxx. Please review the enclosed contract from the original creditor and contact our office immediately to discuss payment arrangements

Bill Collector

Not all validation responses are the same, but this one incorporates what you're most likely to encounter. This debt collector has included the amount you owe (like that's a big secret) and a blank credit card agreement. The debt collector calls the blank credit card agreement a "contract." This is a psychological ploy to make the uninformed consumer believe that the collector has just sent him a copy of his contract with the original creditor and therefore must have adequately validated the debt.

And more often than not, the blank credit card agreement the collection agency sends isn't even the same agreement that you signed. Unless you have the original agreement handy, there's no sure way of knowing, but that would certainly be an interesting fact to bring up in court.

What the Law Says (and doesn't say) about Proper Debt Validation

This is where things get really sticky. I've seen it everywhere that a response from a collection agency isn't a "legitimate" validation unless it contains a copy of the contract the debtor signed with the original creditor (bearing the debtor's signature) and, in the case of credit cards, the signed credit card slip for every purchase made.

I really hate to burst your bubble, but the law does not require a collection agency to find that for you. Here's where the FDCPA fails you: it does not define what constitutes a legitimate debt validation. That is not an oversight on the part of the Federal Trade Commisison. Trust me when I tell you that slip up was intentional. You see, if the FDCPA clearly defined debt validation, then collection agencies would legally have to provide exactly what the FDCPA required. Because most of them can't provide anything even resembling a legitimate validation, their lobbyists work hard to ensure that they never have to.

That does not mean that you're out of luck. While the FDCPA doesn't define validation it does note that the collection agency must provide you with the name and contact information for the original creditor. It's not much, but its a start – especially if the collection agency "validated" your debt without providing you with this information.

FTC Opinion Letter on Debt Validation

Just because the FDCPA does not formally state what a collection agency has to provide you with, that doesn't mean that some of the head knockers over at the FTC don't have their own opinions as to what does and does not constitute validation. This letter from Jeffrey Wollman clearly sides with the consumer on the issue:

FTC Opinion Letter

How Do I Respond When the Collection Agency Validates?

If the collection agency sends you their basic "Here's what you owe" letter and a blank credit card agreement in response to validation, its a good idea to point out that no reasonable person would consider that validation. Here's a sample response for the above situation. Remember, you should always tailor your letters to fit your specific situation.

To Whom It May Concern:

I requested a validation of the debt your company claims I owe on xx/xx/xxxx. In response, I received a letter noting the amount that I allegedly owe and a blank credit card agreement. Consumers have the right to request a validation of debt to ensure that the company collecting the debt has not made an error. Sending me notice of the amount I supposedly owe does not prove that I owe the debt, it merely proves that your company seeks to collect the specified amount. In addition, the blank credit card agreement merely illustrates the rules and regulations applicants must agree to when applying for that card. It does not contain my signature and, as such, has nothing to do with me.

Please note I am not requesting a verification of your records or a verification of the credit card company's current policy. I am requesting proof that I incurred this debt, how much was incurred and that you have the right to collect it. Proof of my liability is my legal right under the Fair Debt Collection Practices Act.

John/Jane Doe

Even if the collection agency doesn't send validation, you're accomplishing two things with this letter:

1. You're demonstrating that you know your rights and you won't be easily bullied. You'd be surprised how many people manage to avoid lawsuits simply because the collection agency knows they are well informed and thus more likely to pose a threat to the company's bottom line in court.

2. Should the issue end up in a courtroom, your letter will pass through the judge's hands (provided you remember to keep your paper trail!). The letter tells the judge, in no uncertain terms, why the collection agency's validation wasn't a real validation. Sometimes, a simple consumer letter explain your debt validation issue far better than a consumer law attorney ever could. 

Tuesday, December 20, 2011

Do I Owe My Husband's/Wife's Debts After Marriage?

If you're like most couples, getting married means co-mingling your clothes, junk and, of course, your finances. The last thing any money-savvy person wants to do, however, is to marry into debt. If your new husband or wife owes money to collectors, getting married could land you in hot water even if you aren't the one responsible for paying off the collection accounts.

Responsibility for Husband's or Wife's Debts

I cringe every time I see something floating around online discussing "marital debt" and how husbands and wives are legally obligated to pay off the other's debts. Your responsibility for debt that your spouse owes depends upon your state laws and your specific situation. I'm going to try to plow through the complexity of marital debt here and break it down for you once and for all which portion of your husband or wife's debts you do or do not owe.

You'll be pleased to know that you aren't legally responsible for paying off the thousands' of dollars worth of credit card debt that your spouse racked up before meeting you, the defaulted student loan he's hiding from or that old collection account that just keeps growing. Marriage may make two people "one" from a religious or moral standpoint, but that connection doesn't hold water in the financial realm. Now listen up, because this part is important: You have no liability for debts your husband or wife incurred that existed prior to your marriage no matter what state you live in.  Got it? I don't care what the credit card company or debt collector said (lies), if your husband or wife accrued these debts before marrying you, you are in the clear.

Community Property States and Marital Debt

Before we go any further, I want to address community property law. Nine states are currently community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas 
  • Washington
  • Wisconsin
In general (the exact laws governing community property vary for each community property state), any debts or assets that a couple incurs during the course of a marriage are the property or responsibility of both parties.  Thus, if your wife racks up a $5000 credit card debt and you live in a community property state, you're just as responsible for paying off the debt as she is. Because you were married when she made the charges, the account constitutes marital debt even if you weren't aware the account existed. 

But – and this is a big "but" – community property law does not apply to debts your husband or wife owed before you got married. Those debts remain separate. Period. So the good news here is that living in a community property state does not mean that you have to assume liability for your fiance's past financial mistakes. 

Marrying Into Debt

Ok, so you know you aren't legally responsible for your husband or wife's debts provided he or she incurred those debts before the two of you got married. That does not mean, however, that the existence of these debts can't have a negative impact on your finances and your marriage. 

Your spouse is responsible for payment. That means that payment for the debt must come out of your husband's or wife's income – income that would otherwise be directed to running your household. So while the debt isn't marital debt and you don't have to pay collectors directly, you'll still feel the financial blow when collectors come calling. 

Saturday, November 19, 2011

How Debt Collectors Find You

You've been very careful hiding from debt collectors. You moved to a new home, changed your telephone number and even switched banks. Unfortunately, doing all of these things isn't always enough to throw a collection agency and its skip tracers off your trail. Here are just a few of the methods that debt collectors use to find you:

The Post Office

If you moved recently, you may have filled out a change of address form with the post office. The post office uses your forwarding address form to reroute any mail sent to your old address to your new address. Even if you did not provide collection agencies with your forwarding address, the post office will provide a debt collector with that information upon request.

Credit Reports

Because you owe collection agencies money, they have permissible purpose under the FCRA to pull and review your credit report. As soon as you notify your current creditors of your change of address, those creditors report the new address to the credit bureaus. Your new address then appears on your credit report and debt collectors can use the information to contact you.

Skip Tracing

Collection agencies often employ skip tracers. A skip tracer is a form of private detective that helps collection agencies locate debtors who have "skipped" out on their debts. Skip tracers review public records, such as marriage certificates and property records to find out everything from your current contact information to your Social Security number. In certain states, skip tracers and debt collectors alike can even search the DMV's records for information about your whereabouts.

Social Networks

Think your information is safe on Facebook or Google Plus? Think again. Even if you set your social networking profile to "private," individuals viewing your profile can still see your location. If the person viewing your profile is a debt collector, he or she can use your city and state as a starting point for tracking you down.

Your Relatives

Collection agencies can obtain the names of your family members through the "next of kin" information on your credit applications, through your social networking profile, or through the good old fashioned phone book. While a debt collector cannot give your family members any information about your debt,  the collector can contact your family members in order to obtain your telephone number or address. Federal law restricts collectors to only contacting a given family member once unless the company has cause to believe the individual purposely lied to help you hide from your debt.

Friday, November 18, 2011

Court Ruling Restricts Collection Attorney Scare Tactics

No matter how much debt collectors have hounded  you in the past or how many FDCPA violations they rack up, know that the corruption that runs rampant in the collection industry doesn't always run unchecked. This past April, the U.S. Third Circuit Court of Appeals ruled that a collection agency's company attorney can only send the debtor letters using the attorney's letterhead if the attorney is acting in a "legal capacity" rather than merely as a debt collector himself.

Sound confusing? Let me break it down further. First, lets take a look at the FDCPA's rules regarding what debt collectors can and cannot do when communicating with debtors. Here's a peek at Section 807

Section 807: False or Misleading Representations

 807. False or misleading representations
A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section...

(4) The representation or implication that nonpayment of
any debt will result in the arrest or imprisonment of
any person or the seizure, garnishment, attachment,
or sale of any property or wages of any person unless
such action is lawful and the debt collector or creditor
intends to take such action.

(5) The threat to take any action that cannot legally be
taken or that is not intended to be taken.

Collecting By Fear 

In a nutshell, this means that the collection agency can neither threaten to sue you outright nor imply that they may sue you if they either don't have the legal right to do so (such as after the statute of limitations passes) or if the company does not intend to take legal action.

While this seems like good old common sense, the reason these provisions are included in the FDCPA is to protect debtors from abusive debt collectors who use fear as a collection tool. A debtor who believes he'll be facing a lawsuit if he doesn't pay is more likely to pony up the cash than someone who knows the collection agency doesn't have a leg to stand on. Collecting by fear is generally considered unethical. Thus, the FDCPA forbids this debt collection method unless the collection agency is willing to back itself up with an actual lawsuit.

Collection Agency Attorneys

Now, remember that talk we had about collection agency attorneys? If so, then you'll recall that collection agencies that do not use in-house attorneys sometimes pay third-party attorneys to draft letters to debtors. These letters usually contain a small disclaimer somewhere noting that the attorney has not personally reviewed the debtor's case. Collection letters on an attorney's letterhead are an effective collection tool because they essentially let the collector skirt the "implied" lawsuit ban put in place by the FDCPA. The debtor sees a letter from an attorney and automatically assumes he is in danger of a lawsuit, even if the letter does not say anything to that effect. As a rule, a debtor is more likely to pay off his debt after receiving a collection letter from an attorney rather than from a collection agency.

The unspoken threat that a collection letter from an attorney poses is clear: Pay the debt or we'll take you to court. After the April 2011 ruling in  Lesher v. The Law Offices of Mitchell N. Kay by the U.S. Third Circuit Court of Appeals, that loophole is no longer an option for collectors.

The Case

The situation behind  Lesher v. The Law Offices of Mitchell N. Kay is a common one. A collection agency enlisted a third-party attorney to collect an unpaid debt from the plaintiff, Mr. Lesher. The collection letters from the attorney's office arrived on the lawyer's letterhead. Of the two letters Mr. Lesher recieved, neither posed an outright threat to sue. According to Lesher, however, that threat did not need to be made directly. The very fact that the collection letters arrived on company letterhead implied that the collection agency could and would sue him.

You don't want to end up here

Lesher filed a lawsuit based on violations of Section 807 of the FDCPA. The violation was a simple one: a letter from a collection attorney strongly implies that a lawsuit may follow in the event the debtor does not pay.  The collection attorney created this implied threat yet did not so much as review Mr. Lester's file. Although attorneys can act as debt collectors, many simply draft individual letters for collection agencies to add weight to payment demands.  Lester won his lawsuit and, by doing so, put case law on the books that goes a long way toward closing the loophole of collection attorney letters that collectors previously enjoyed.

The Pending Brief from NARCA

By establishing a precedent dictating how a collection agency can use a third-party attorney's services when collecting a debt, the U.S. Third District Court of Appeals sliced into the collection industry's profit pie with a wide blade. This prompted a quick response from the National Association of Retail Collection Attorneys, which filed an amicus brief with the court.

I'm not sure if its funny, infuriating or just plain sad. The collection industry isn't immune to the economic problems that plague our country. Aside from a back-door judgment, using collection letters from attorneys was the collection industry's "ace in the hole."

I have no seen or reviewed NARCA's court brief, but I've got a pretty good idea of what it says. Personally, I'm not a big fan of amicus briefs but, in some cases, I can see the necessity of them. An amicus brief is merely a brief filed with the court by a third-party not directly involved in a lawsuit but who will be impacted by the outcome of the case. The amicus brief provides the court with additional information on the case, along with the potential consequences for those not directly involved and the third-party's legal opinions.

Right now everything is pending, so we'll just have to wait and see how the case turns out. All I can suggest is that you keep your fingers crossed that the court tosses NARCA's brief in the trash before moving on to more pressing business. The more protections debtors receive under the FDCPA, the less leeway debt collectors and collection attorneys alike will have when using scare tactics to elicit payment.

Sunday, November 13, 2011

Capital One Charge Off During Credit Counseling

Reader Question: Capital One Charge Off


I became unemployed and fell behind on bills. The last priority was credit cards.I talked and worked with these companies the whole time. Luckily, I became employed once again. I joined a legitimate credit counseling service to setup payments. Capital One accepted the counseling services agreement. I have been making payments for a number of months on time and without issue. I recently checked a copy of my credit report, one of the free ones we are entitled to each year. I noticed that Capital One had reported my account as charged off. I called them to confirm this and the representative I spoke with said that was indeed the case. I inquired why it was charged off when I was on an agreement repayment plan. She really had no answer for that but said that there was nothing she could do about it.  

I am in a repayment plan for an account I have already been charged off on. Should I stop the payment agreement? Is there any mechanism or circumstance in which the credit card company can recall my debt? Is there anything I can do to urge them to do this? Why and under what authority are they still accepting my payments if indeed my account has been charged off? Should I not be entitled to a full refund of these payments?

What I would like to happen is for the credit card company to recall the debt so that I can pay it off and for it not to appear as a charge off on my credit report. Any thoughts, ideas or suggestions would be greatly appreciated. 



I think most of your questions will be answered by me explaining how a charge off works. When a credit card company charges off your account, it generally sends the account to the company's collection department or sells it to a third party agency. Charge offs occur without fail once you go 180 days without making a payment. A charge off does not mean that the company has discharged the debt and you no longer owe it. Capital One still owns your debt and you still owe it. It just appears in a different place on the company's profit and loss statement this year.

Capital One is still accepting payments because they still own the account. They don't owe you a refund because you still owe the debt, regardless of how the debt appears in the company paperwork or on your credit report. Sounds harsh, I know, and I don't mean to be. Just trying to explain how the system works.

The company can't "recall" the debt in the sense that they can retrieve it from a third party because it never went to a third party. They can remove the charge off from your credit report, no matter what they say. Any company with a contract to report information to the credit bureaus has the right to modify or delete that information. It's unlikely, however, that Capital One would modify your credit report and remove the charge off. Not only is it accurate, but they're receiving regular payments from you. What incentive do they have to modify the account? None.

That's not to say that you should stop paying the credit card company. Your regular payments are the only thing preventing that charged off account from being turned over to a collection agency. If your account were to get turned over to a collection agency, the collection agency would make yet another note of the debt on your credit report and your credit would suffer further.

Original creditors like Capital One typically only modify credit information in the event they made a mistake. Even if you were to stop paying and offer to resume payments in exchange for a removal of the charge off, the company is more likely to sue you than to remove the charge off from your credit report.

Per federal law, the charge off will disappear on its own 7 years from the date it was charged off. Unfortunately, the charge off doesn't disappear after you pay off the debt in its entirety. The credit card company is required by law to update your credit report to reflect the debt was paid once you pay it off. A paid charge off, however, is just as bad for your credit score as an unpaid charge off.

It's a shame that responsible people such as yourself who try to do the right thing and pay their bills have to suffer the same consequences they would have suffered had they simply left the debt alone. You have a small advantage in the sense that you don't have to deal with a collection agency damaging your credit report and harassing you all day and night.

So grit your teeth and keep making those payments until the debt is paid off. The older it gets, the less negative impact it will have on your credit scores.

Now, if you never stopped making payments on the account, it should not have been charged off – regardless of the fact that you were enrolled in credit counseling. If that were the case, the charge off is a legitimate error that Capital One has to address. In that case, I recommend you get the name and contact information for a senior account manager and send a polished, professional business letter explaining that your account was charged off in error and ask that he remedy the situation. Letters always seem to work much better than telephone calls. Best of luck to you.


Collection Agency's Early Bank Withdrawal

Reader Question


I have an issue with a collection agency (FAST) who has called me a criminal, a baby, and a bunch of other things while on the phone with me, as I was setting up a payment plan.  in that payment plan, I made arrangements to pay $100 then, then $230 each 18th in Nov, Dec, and Jan to pay it off.  These were for checks.  Even after paying almost half, they are threatening to have me charged with a felony.  The agent who did the agreement made a mistake and put the payments in for the 4th of each month (which I would never do since that is rent time) instead of the 18th, and refused to fix it when the first payment came out.  I asked to have a copy of the conversation pulled since they announce that they record the calls, and was told that they wouldn't and they "would trust their rep over a criminal."

There is much more to what was going on with their abuse, but I was wanting to find out if they were doing anything illegal by taking money out of my account 2 weeks before they were supposed to.



You aren't the first person to learn the hard way that giving a collection agency your banking information and permission to withdraw payments directly from your account is a very bad idea.  First of all, this was a purposeful "mistake." The most likely scenario is that the debt collector you spoke with scheduled your payment before his monthly cutoff so that he would be sure to get his commission from your payment a month early. It's particularly heinous when you consider that now you are enduring extreme financial stress as a result of the measly $10 or so extra the rep wanted in his pocket this month. 

Lets get one thing straight: You are not committing a felony by not paying. You aren't even committing a crime. They can't have you charged with a felony. The ironic part of that is that just threatening to charge you with a felony is against federal consumer protection laws. 

Let's see what Section 807 of the Fair Debt Collection Practices Act has to say about this, shall we?

FDCPA: Section 807 (4) (7)

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section...

(4) The representation or implication that nonpayment of 
any debt will result in the arrest or imprisonment of 
any person or the seizure, garnishment, attachment, 
or sale of any property or wages of any person unless 
such action is lawful and the debt collector or creditor 
intends to take such action...

(7) The false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer. 

Barring all the legalese, that basically states that it is illegal for a collection agency to tell you that you are committing a crime if you aren't. It's also illegal for a collection agency to threaten to take any action against you that it does not have the rock-solid legal right to take. 

Thus, the collection agency could sue you if your debt was still within the statute of limitations (which it is now that you've made a payment) but they can't tell you that you are committing a crime or threaten to "have you charged" with a crime. The only real crime here is the clear disregard this company has for federal law. 

Unfortunately, unless you wrote down the date and time of the call and who you spoke with, your odds of proving that this FDCPA violation occurred are slim. Unless, of course, it happens on a regular basis in which case I highly recommend "collector baiting." But you'll get your chance to do that (hopefully) after you remedy the current situation.

The first step you need to take is to make an appointment to speak with someone at your bank in a power position. Basically, anyone who isn't a teller. Explain that a company is withdrawing payments from your account without your permission. You have done all you can to get this problem remedied through the company with no results.  Tell the bank that these withdrawals are unauthorized and ask that it block all automatic withdrawals without your prior approval. Don't be surprised if your bank won't do this. It's much easier for a bank to just pay out whatever merchants ask and then pursue you for payment. Some banks, however, will try to help you – especially if you are a long-standing, good customer. 

The bigger the bank, the less likely they are to help. For this reason I sincerely hope that you're not banking with Bank of America or Wells Fargo or some place like that. 

If the bank won't block all automatic withdrawals, you want to close your bank account and open a new one. Now, and this is important, make sure that if you close your account the bank will block the payments and not withdraw them from your new account, pay them and then send you a bill,  or re-open your old account, charge them to your account, and then charge you an NSF fee for the "service." Get this in writing if you can do so without looking like a jerk. 

If you really want to be on the safe side and your credit's okay, open your new account at a completely different bank. In the event the company ever tries to gutter-sue you and garnish your bank accounts, having an account at a totally different bank makes you that much harder to find. Closing your bank account and opening up a new one is a big hassle, but its something that's often necessary when you've got collectors who have your banking information. 

Here comes the bad news: some banks won't play ball. They'll let you close your account, sure, but they're still going to pay out the collection agency's early claim and then pursue you for each claim they had to pay (plus fees). According to these banks, its the customer's responsibility to notify creditors of a change in banking information. In reality, its just another excuse to charge fees. 

Collection agencies cannot legally withdraw money from your bank account without your permission unless they have a judgment against you or have your permission.  Once they have your permission, watch out! Personally, I'm surprised that a company unscrupulous enough to call you a criminal didn't just withdraw the entire balance you owed right then and there. 

Start documenting debt collectors' behavior immediately. After you navigate the piles of red tape at your bank to prevent this early withdrawal from happening again, file a lawsuit against the company for its oh-so-stunning FDCPA violations and get your money back  :)


How to Document Debt Collector Harassment: Keeping an Evidence Folder

If you're hiding from the telephone or cringing every time you pick up the line, you might be a victim of debt collector harassment. I'm not going to outline exactly what constitutes abuse from collectors because I've talked it half to death in the past, but I am going to point out some good ways to document debt collector harassment and create an evidence folder of the abuse. Not only does creating a paper trail help you defend yourself, it can be essential in making the abuse stop.

Documenting Debt Collector Harassment

Many, many people I talk to fail to properly document debt collector harassment because they feel that doing so would be both pointless and difficult. If you're skirting collection calls, you've already got a lot on your plate. I know that. But keeping a log of the abuse helps you prove it in court.

Now your eyes have gotten big and you're thinking, "But Lee, I don't want to go to court!" I know that too. Keep in mind, however, that you may have grounds to sue the very collectors that are harassing you. If you win, you may be entitled to monetary compensation and the collection agency may just think twice before inflicting the same torment on another debtor. Documenting your communications with collectors also helps you defend yourself in court if the collection agency sues based on something you supposedly did or said that you can subsequently prove never occurred.

Documenting Telephone Harassment 

The vast majority of debt collector harassment takes place over the telephone. This is because the majority of a collection agency's business occurs over the phone and because its much harder for debtors to prove that a debt collector violated the FDCPA during a phone call.

Here's what I want you to do: If you're old school and you're receiving collection calls over your landline phone, put a pad of paper and a pen next to the phone. Don't move it. Tell your family not to move it. You'd be surprised how often debtors actually try to pull this off only to discover that their paper and pen is gone when they need it most. Glue it to the counter if you have to, just make sure its there. If you're taking the calls over a cell phone, grab paper and a pen as soon as you answer the phone or see the call coming in. Note the following:

  • The date
  • The exact time of the call
  • The name or employee reference number of the debt collector you spoke with
  • What the debt collector said to you. Be as specific as possible.
  • What you said to the collector
  • If you have the ability to record the call, record as many collection calls as you can and keep written notes on the rest.

After the call, take the time to put your notes into a manila envelope or folder meant for housing nothing but your documentation of the harassment harassment.

Tip: If you don't want to answer the telephone when debt collectors call, you can still document the frequency of their calls as part of a harassment claim. Make sure you note the date and time of each call and the number the call came in from.

Documenting Mail Harassment

A collection agency is going to take great care not to openly harass you via mail. The company knows better than to provide you with clear lawsuit fodder. That does not mean, however, that collection agencies never violate the FDCPA in their written communications with debtors; they do. Because of this, its important that you save each and every letter you receive from a collection agency. Make a photocopy of each collection letter and put the collection letters in the same envelope as your phone harassment logs.

Organizing the Evidence Folder 

Keeping a thorough record of debt collector harassment isn't always enough. You need to create a paper trail of events that demonstrate the collection agency's action, your reaction, the collection agency's response, etc. Thus, its important that you date each piece of evidence you create and keep your files in order.

If you send the collection agency a cease and desist letter, for example, include a copy of the cease and desist letter in your evidence folder. If you're smart and send all communication CRRR, keep copies of the green cards in your folder. You can also include any communication you may have had with the original creditor about the debt in your evidence folder as well.

How Documenting Harassment Benefits You

I know what you're thinking: "If I show up in court with a bunch of written notes, its just my word against theirs! The judge will never believe me!" Here's how keeping good track of your evidence, even handwritten evidence benefits you:

  • The judge will see that you took the time to keep track of and organize records. This is far more than most debtors bother to do. That effort alone speaks volumes. 
  • Collection agencies record all of their calls. The judge can look at your records and request that the company locate and turn over recordings of each call you cited. 
  • The judge will take into consideration your evidence record as a whole and the story it tells. If your documentation of the harassment includes your own efforts to communicate and solve the problem, this speaks strongly in your favor. 

and here comes what is, for some, the best reason to keep good documentation of harassment by debt collectors:

  • If you already have a thorough record of debt collector abuse, your attorney or consumer advocate has to do less work to help you. You've already done the work for them. The end result? Your defense costs less. A LOT less. 

The moral of the story? Start creating an evidence folder documenting debt collector harassment as soon as possible. You never know what the future may hold, and keeping good records and creating a paper trail can never hurt.

Tuesday, September 13, 2011

Statute of Limitations for a Collection Agency Judgment Lien

We've already talked about the statute of limitations for debt collection lawsuits, but there is another statute of limitations that I don't think I've mentioned yet – the statute of limitations for collection agency judgment liens.

How a Judgment Lien Works

After a collection agency successfully sues you, it receives a court judgment. The court judgment gives a collector rights it did not previously enjoy. One of those such rights is the right to place a lien against your home. Such as lien is often referred to as a "judgment lien" because it is the direct result of a creditor's court judgment against you.

Judgment liens give creditors a security interest in your home
Once the collection agency attaches its judgment lien to your property, it owns a security interest in the property equal to the amount of the judgment. A judgment lien against your real estate (and, in some cases, against your car) secures the collector's previously unsecured debt.

How a Judgment Lien Can Hurt You

While any secured creditor has the right to seize the collateral securing its debt if the debtor does not pay, most collection agencies aren't going to place a lien on your home and immediately move to foreclose. This is because most homes today have mortgages against them. Because the mortgage lender filed its lien first, the mortgage lien has "priority" over the judgment lien. This would force the collection agency to pay off your mortgage if it wanted to foreclose on your house – not something most debt collectors are willing to do.

A judgment lien hurts you not because it gives the collection agency a claim against your property, but because it limits your ability to sell your property to another individual.

Selling a House That Carries a Collection Agency Lien

If you wanted to get strictly technical, you can legally sell your house to anyone you please, no matter how many liens it carries. The liens, however, stay with the property. If your buyer plans to finance his purchase using a mortgage lender, the mortgage lender will conduct a title search, find the judgment lien, and immediately balk.

You'd be hard-pressed to find a mortgage lender willing to loan a buyer the money to purchase your home until the collection agency releases its judgment lien. Remember how I mentioned that the collection agency would have to pay off your mortgage to foreclose on your home because your mortgage is a superior lien? In this case, the judgment lien would be the superior lien. If the mortgage lender ever needed to foreclose on the property, it couldn't do so without first paying off the collection agency's lien.

Selling your home? Think again
But here's where things really come to a head: As soon the collection agency realizes it holds the superior lien on a property, it can foreclose and seize the home no matter who owns it or who the other lien holders are (I'm not including tax liens here. Tax liens are a whole 'nother can o' worms that I do NOT want to open today.). Foreclose wipes out junior liens. Thus, if the buyer's mortgage was for $100,000 and the collection agency's judgment lien was for $5000, the mortgage lender would lose $100,000 over a $5000 debt (In this case it would sue the homeowner, but to a mortgage lender it just isn't worth the risk).

The potential for a big financial mess is enough incentive to prevent mortgage companies from financing home purchases if the home in question carries a lien.

Judgment Lien Statute of Limitations

The statute of limitations for judgment liens is dictated by the length of time a creditor can enforce a judgment in the debtor's state of residence. Let's use California for an example. In California, judgments are valid for ten years. After the statute of limitations passes, the collection agency can still collect on the judgment, but only if the debtor pays the debt voluntarily. The collection agency must also release its property lien.

Now, lets talk about renewal. Most states give judgment holders the right to renew their judgments if the judgment is close to expiring and creditor has not yet collected the judgment. We're still in California, guys. The collection agency has decided, after nine years, to renew its judgment....but the lien still expires on the date the original judgment was scheduled to expire (bear with me, I'm trying to make this as simple as I can).

The collection agency renewed its judgment, but it couldn't renew its lien. The renewed judgment gives the debt collector the right to file a brand new property lien, but it loses the priority of its previous lien. Thus, any liens filed after the collection agency's original judgment lien were once junior liens but, because the priority order did not change for those liens, they are superior to the creditor's claim when it files its second lien after renewing the judgment.

Judgment Statute of Limitations and Lien Laws Vary By State

I was using California law as an example, but the same policies apply in many states. Others do not allow creditors to re-file liens upon renewing a judgment. If you know the statute of limitations for enforcing a judgment has already expired in your state and a collection agency holds a judgment lien against your home, you can demand that the company immediately release its lien and send you written notification that it has done so.

If you're curious about the statute of limitations for judgments in your state, check out this chart from Collection Laws & Exemptions It lists the statute of limitations for both lawsuits and judgments in all fifty states.

Related Posts:

Can a Collection Agency Take My House?

The Lawsuit Statute of Limitations

Sunday, September 11, 2011

Debt Consolidation For Accounts in Collection

If old debts that ended up in collections are haunting you at every turn, debt consolidation may be a viable option for eliminating collection accounts and restoring your credit. Whether or not consolidating collection accounts is a smart decision financially depends on how old the collections are, the statute of limitations in your state and when you plan to purchase a big-ticket item that would result in a credit inquiry.

How Debt Consolidation Works

Contrary to popular belief, debt consolidation doesn't combine all of your debts. At least, not exactly. Debt consolidation occurs when you take out a new loan to pay off your existing debt. You then repay the debt consolidation loan over time. Debt consolidation doesn't reduce the amount of debt you owe, but it does make paying your debts much simpler since you only need to make one payment each month rather than the numerous payments you made before getting the loan.

Turn numerous debts into one monthly payment

Consolidating Debts in Collections

Any unsecured debt is available for inclusion in a debt consolidation loan – including collections. If collection agencies are threatening to sue you and the statute of limitations on each account has yet to expire, paying off those collection accounts may protect you from property liens, garnishment and other unpleasant situations in which debt collectors collect the debt by force.

Most collection agencies will set up a payment plan for you if you can't pay off the debt all at once, but being capable of paying off a collection agency debt in its entirety gives you greater negotiation room for a settlement. Although collection agencies will accept partial payments, they'd much rather receive a lump sum. Thus, consolidating collection accounts can be very beneficial for those who have high collections debts they cannot afford to pay.

Debt Consolidation Loan Interest Rates

If you're consolidating credit card debt, medical debt, personal loans, etc., debt consolidation does more than simplify the process. It can actually save you money. This is only true, of course, if your interest rate on the debt consolidation loan is less than the current interest rate your other creditors are charging you.

Unless your collection account started out as a credit card debt and the original contract you signed stipulated that interest charges would continue to accrue should the debt end up in collections, a collection agency cannot legally charge interest on your debt. Unless you can talk the collection agency into forgiving a significant amount of the debt, you'll be paying more over the long run with the debt consolidation loan.

Debt Consolidation Dangers

If you decide that a debt consolidation loan is right for you, make sure to shop around and read the fine print. Not all debt consolidation companies use ethical business practices and, if you fall victim to a scam, you may find yourself in a deeper financial hole than the one you're currently trying to dig yourself out of. Watch out for the following:

  • Scam artists: Not all companies that advertise debt consolidation are actually consolidators. Some are debt negotiation companies who take your payments each month and put those payments into a separate account to be used to negotiate settlements with creditors and collection agencies. Not only does this practice destroy your credit scores, it also places you in danger of new collection agencies popping out of the woodwork when your original creditors don't get paid and sell your delinquent debts as a result. 

  • High Interest Rates: If you have collections on your credit report, your credit score probably isn't stellar. Like any loan, the interest rate on a debt consolidation loan is based on your credit scores. If you do not qualify for a low interest rate, you may end up paying significantly more over time than if you'd ignored the debts and waited for them to simply fall off your credit report. 

  • Property Loss: Many debt consolidation loans are actually home equity loans and secured by the equity you hold in real estate you own. If future financial troubles result in you defaulting on a home equity loan, you could lose your property to foreclosure as a result. 

  • Additional Debt: If you include your credit card debt along with collection agency debt in your consolidation loan, it can be very tempting to rack up new charges once your cards are paid off. Even though doing so isn't a bright financial move, I can't even begin to tell you how many people do this. Those individuals are then left paying off their original debt consolidation loan and their new debt. 

Friday, September 9, 2011

How to Answer a Lawsuit Summons From a Collection Agency

If you get a summons from a collection agency, that means you are one of the unlucky debtors the collector decides to sue. You cannot ignore a summons and complaint. If you write it off as just another threatening letter structured in legalese to frighten you, you'll end up facing a default judgment. A default judgment gives a debt collector the ability to take such aggressive collection action against you as garnishing your wages, seizing your bank accounts and placing liens on your home and car. Answering the collection agency summons properly is the first step in fighting the debt collection lawsuit.

Read the Summons and Complaint Carefully

On a first read-through, the summons and complaint may be confusing – especially if the collection agency's attorneys intentionally structured the documents to contain as much convoluted legal jargon as possible. If you can't understand what the document says, its better to pay for a consultation with an attorney to have him explain the summons and complaint to you than responding incorrectly.

The summons should be fairly straightforward. It notifies you that you have been sued, notes who filed the lawsuit, notes the amount of time you have to respond to the summons and complaint and gives you a date and time to appear in court. The complaint, however, should contain each of the allegations the collection agency made against you. It's the complaint you must respond to.

The vast majority of people who receive a summons ignore it, either out of fear or apathy. Of those that do respond, many respond incorrectly and don't force the debt collector to prove its case in court. You want to admit to as little as possible in the hopes that the collection agency cannot prove its case and the judge dismisses the lawsuit.

How to Answer a Summons and Complaint

You don't have to use a special form to respond to a summons and complaint. Merely go down the list of allegations and respond to each in turn, noting whether it is true, false or partially true and why.

Unless you are using an expired statute of limitations as your defense in court, you will need to deny the allegation within the complaint noting the amount of the debt you owe. You want the court to make the collector prove that you owe what they say you owe. If the only income you have is exempt from garnishment, like Social Security payments, you may want to also include this in your Answer. A collection agency may lose its desire to continue with the lawsuit once it sees that collecting a judgment afterward will prove difficult, if not impossible.

The good news here is that most collection agencies that bother to sue do so after the debt has been bought and sold numerous times. When that occurs, the likelihood of the collector having any evidence at all to back up its claims is slim to none.

Turning in an Answer to a Court Summons

After you complete your Answer, make three copies. Keep the original. Drop off one copy at the courthouse where your hearing will take place, mail one copy to the collection agency suing you and send the last copy to the collection agency's attorney. While you aren't required to send your answer to both the collection agency and its attorney, doing so is a good idea because it covers all the bases.

Your initial goal by answering the collection agency's summons should be to get the company to drop its lawsuit. Just filing a response is a good start. If the debt collector knows you are going to force it to prove its case in court and it cannot prove its case, its likely to drop the lawsuit rather than fall deeper into the hole financially by moving forward with the case.

Related Posts:

Should You Send a Debt Validation Letter After Getting a Lawsuit Summons?

How to Use An Affirmative Defense in a Collection Agency Lawsuit

Make Yourself Judgment Proof

Should You Send a Debt Validation Letter After Getting a Lawsuit Summons?

Just about everybody has heard horror stories about collection agencies suing debtors. In lean economic times, lawsuits from debt collectors occur more frequently. Receiving a summons and complaint in the mail from a bill collector sends many panicky debtors directly to their computer. After doing some mild research in a variety of credit forums, they determine that the best course of action is to send the debt collector a debt validation letter. It makes the perfect answer to a summons, since all collection activity must stop until the collection agency validates the debt, right?

Wrong. And if you do this, you might just find yourself in hot water.

Debt Validation After a Court Summons

Collection agencies don't sue debtors as soon as they purchase their accounts. From a financial standpoint, doing so would be stupid – especially if collectors can convince a fair number of debtors to pay up without ever paying an attorney or setting foot in a courtroom.

So the collection agency will call you...and send you letters...and call you some more...and offer you a settlement....and so on and so forth. By the time the collection agency finally bites the bullet and files a lawsuit against you, its been trying to squeeze payment out of you for a very long time.

The Fair Debt Collection Practices Act notes that, while any debtor can demand that a collection agency validate their debt, they must do so within 30 days of their first contact with the collection agency. After that initial 30 day window, the collection agency is not legally obligated to either respond to the debt validation request or drop the lawsuit.

Answer The Summons, Then Ask for Validation

If you never recieved any notice that you owed a debt and the summons and complaint is the first paperwork you've ever gotten from the collection agency, you still have your 30-day window of time in which to ask the debt collector to validate the debt – but your validation request does not constitute an answer to the summons. If you have legitimate grounds to contest the lawsuit, by all means, send the validation letter, but if you don't file a formal answer to the summons with the court, you will find yourself facing a default judgment from the collection agency.

GC Services Collection Agency in Los Angeles

The Los Angeles-based collection agency GC Services has recently come onto my radar as they are one of the many collection agencies that do double duty collecting both commercial and government debts. This is the perfect example, in my opinion, of how the lines between government and the debt collector get blurred.

GC Services

GC Services came out of nowhere with a government contract to collect unpaid traffic tickets and the fines associated with them for Los Angeles county. This collection agency operates in much the same way as the others: collecting debt via dunning letters, phone calls, and credit report entries. I'm not concerned with GC Services' collection policies when it comes to retail debt. In that category they're just like any other debt collector. It's their government affiliation that bothers me.

Where Federal Law Gets Murky

Guess what? If you don't pay your traffic ticket, miss your court date but want to simply pay the thing and get it over with you can't just walk up to the clerk's office to pay the ticket. You have to deal with a GC Services representative. The court makes it easy for you by giving the collection agency its own window in the courthouse!

I'm floored by this. Honestly floored. According to the Fair Debt Collection Practices Act, the following behavior is prohibited:

"The false representation or implication that the debt 
collector is vouched for, bonded by, or affiliated with 
the United States or any State, including the use of any 
badge, uniform, or facsimile thereof."

And giving GC Services a booth in the Los Angeles county courthouse sends what message, exactly? Granted, this particular collection agency is obviously affiliated with the state of California (however tenuous that affiliation may be), but giving GC Services its own window and giving collection agents the ability to schedule court dates is confusing to debtors. They believe their state government and the collection agency are one in the same. This leads them to believe whatever the collection agent at the window or over the phone tells them – even if the information is inaccurate. We have statutes specifically to prevent this, yet its happening.

Wait, it gets worse. I have been informed that some consumers have been told by collection agency representatives that they have no other option but to pay off their traffic tickets and the resulting fines immediately. That isn't true. You can still contest a California traffic ticket after you miss your court date. You have the right to request a new court date and either fight the ticket or ask that the court reduce your fine....but there's no guarantee that a government collection agency responsible for collecting ticket fines is going to tell you that. Lets see what the FDCPA says..

"The use of any false representation or deceptive means 
to collect or attempt to collect any debt or to obtain 
information concerning a consumer"

Telling you that you can't have a court date when you can in order to procure payment is pretty deceptive, don't you think?

Paying the Traffic Ticket

Don't expect to be able to swing a deal with GC Services like you can with almost any other collection agency. They demand payment in full and your partial payments won't be accepted. This policy isn't restricted to unpaid Los Angeles parking tickets, but extends to all debts the company purchases.

From a financial standpoint, not accepting partial payments doesn't make much sense unless the company does accept partial payments and uses its "policy" as a scare tactic to bloat the importance of that particular debt. From what I can gather, the company will accept partial payments after a whole lot of haranguing, but in a few months they may just call you back demanding the full amount again.

Word to the wise: If you talk GC Services into a settlement at any point (and this applies to you retail customers. I highly doubt they can or will settle a traffic ticket) get it in writing.

Evidence of GC Services Violating the FDCPA

During my web research, these are just a few of the FDCPA violations consumers claim GC Services committed. Take note, if this happens to you, each of these offenses are illegal and worthy of a lawsuit.

  • Threatening immediate legal action with no intent to follow through on the threat
  • Informing consumers that their debts do not have a "dispute period." 
  • Monitoring and recording telephone calls without notifying the consumer
  • Harassing a debtor's neighbors with repeated telephone calls containing "messages" for the debtors
  • Threatening to garnish a greater amount than federal law permits
  • Lying about obtaining a wage garnishment order

I could go on, but I won't.

How to Fight GC Services

If you owe a fine to Los Angeles County then, by all means, pay your debt and get it over with. Don't wait until the account falls into collections. If you do, you may find yourself the victim of harassment and illegal activity as a result.

Short of filing a lawsuit (and if you've suffered an FDCPA violation and can prove it, you do have a case) there are several other things you can do to fight GC Services and help change the status quo in the process.

Write a letter to California's Attorney General, Kamala D. Harris, detailing your experience with this and any other collection agency that violates federal consumer protection laws. You can file your complaint online with the State of California Department of Justice or write to Ms. Harris at:

Attorney General's Office
California Department of Justice
Attn: Public Inquiry Unit
P.O. Box 944255
Sacramento, CA 94244-2550

    You also have the right to file a complaint with the Federal Trade Commission via the FTC's online Complaint Assistant. Unlike the Attorney General, the FTC doesn't have the option of fighting solely on your behalf, but if it receives enough complaints against GC Services it will mount an investigation and Los Angeles may have to find another collection agency to handle county fines.

    Disclaimer: I do not live in California and have never had personal dealings with GC Services. Any information in this post that does not directly pertain to federal law constitutes my opinion only. 

    Thursday, September 8, 2011

    Security Clearance and Bankruptcy

    Security Clearance and Bankruptcy 

    I see this question quite often, "Can I file bankruptcy and keep my security clearance?" so I'm going to address it here.

    Whether or not you can file for bankruptcy and keep your security clearance or obtain security clearance after filing bankruptcy in the past depends on the following factors:

    • The type of bankruptcy you filed
    • The type of debt you owed
    • Your financial behavior since the bankruptcy
    • How old you were when you filed for bankruptcy (yes, they look at that)
    • How much you owed when you filed

    Why Chapter 13 Looks Better Than Chapter 7 for Those With Security Clearance

    You can file and keep your position
    In general, filing Chapter 13 bankruptcy reflects better on your responsibility level than filing under Chapter 7 because Chapter 13 bankruptcy requires you to repay your creditors whereas, with few exceptions, Chapter 7 lets you walk away from your debts. Because you're trying to create as responsibile a persona as possible for your periodic security clearance reviews, if you have to file bankruptcy, Chapter 13 is usually the safest route to go to keep your security clearance job.

    However, if your debt load is ridiculously high and you qualify for Chapter 7, that doesn't necessarily mean that filing under Chapter 7 will cost you your security clearance. You have to weigh the pros and cons here. Is that job really worth being saddled with all that debt for another 3-5 years? If your debt load is high, you may want to go ahead and take the risk. You can always get another job, but you may not get another chance to have your debt load discharged in its entirety.

    Extenuating Circumstances Behind the Bankruptcy

    Your reviewers will looks at the extenuating circumstances behind your bankruptcy when making a decision about your ability to keep your security clearance. For example, if you filed for bankruptcy as a result of medical bills that got out of control (and you wouldn't be the first) when a family member fell ill, your reviewer can clearly see that your bankruptcy was not the result of a pattern of irresponsible behavior. An illness in your family, and the medical bills that come with it, isn't something you can change (military families have the great, all-encompassing Tricare so this scenario probably doesn't apply, but still...).

    If, however, you filed bankruptcy as a result of credit card debts, high-interest loans and other financial products you applied for and weren't able to keep up with, the security reviewer will see that you bit off more than you could chew financially and will take that into consideration when determining whether or not to extend or terminate your security clearance.

    Post-Bankruptcy Financial Behavior Affects Security Clearance

    Yet another factor your security review takes into consideration is your financial behavior since the bankruptcy. Your reviewer wants to see that filing for bankruptcy taught you an important lesson about managing your finances properly. If you immediately apply for and max out three or four new credit cards after the bankruptcy discharge, that sends the message that you haven't learned anything from your struggles and irresponsibily is the precursor to treason *cue scary music here*

    Take it easy with the credit cards post-bankruptcy

    Your Relationship With Your Chain of Command Makes a Big Difference

    I know each military branch has a different document outlining security clearance regulations and most say the same thing in a different way. What I found very interesting was that the Air Force Academy website emphasizes again and again that having a good relationship with your chain of command has a significant impact on whether filing for bankruptcy will result in your security clearance being revoked.

    While that may seem every different shade of wrong, its absolutely true. Your commanding officer putting in a good word for you may be all it takes for a security reviewer to skim your file and ignore a bankruptcy. You see, the reviewer has to make a decision: Does the bankruptcy indicate you were irresponsible by getting in over your head with your creditors, or does it denote responsibly by demonstrating that you're trying to resolve your debt problems rather than ignoring them? Your commanding officer's opinion of you can make all the difference in this case.

    Sometimes, Bankruptcy is Best

    Filing for bankruptcy won't automatically cost you your security clearance but, if you don't get your debts under control, sooner or later those debts will.

    As a rule, bankruptcy makes me cringe. The vast majority of the time the person could have gotten out of the situation another way but panicked and ran to a bankruptcy attorney who did the whole, "Stop the phones! I can save you!" routine and BOOM! a bankruptcy was slapped on the person's credit report. Sure, the credit bureaus have to remove that bankruptcy eventually, but you can't erase the fact that it happened. You filed. Its a public record. You'll be legally required to declare it on employment and loan applications, if asked, for the rest of your life.

    In the case of those with security clearance, however, bankruptcy can serve as a shield standing between them and their creditors – helping them keep their security clearance and their jobs.

    Related Posts:

    How Collections Affect Security Clearance Jobs

    How Collections Affect Security Clearance Jobs

    For the average individual, collections are a nuisance. For the consumer with a job that requires security clearance, collections pose a threat to their financial stability. If they lose their security clearance, they will likely also lose their jobs.

    As recently as 2007, 50% of all security clearance denials occured as a result of "financial considerations." In other words, "Your credit history makes you a security risk." That number applies to all branches of the military, by the way.

    Do You Have to Have Good Credit to Get and Keep Security Clearance?

    Good credit isn't a necessity to get and keep a job that requires you to have security clearance. What's crucial is that you do not demonstrate a state of financial need. The military wants to see that you are financially stable and not struggling with debt. If the military determines that your debt load is too high, they may just turn down your application for security clearance.

    The DoD can't risk careless workers spilling secrets.
    The reason for this hinges on the information you'll have access to. In the eyes of the Department of Defense, you have a much greater incentive to betray your country and sell sensitive information if you're up to your eyeballs in debt and looking for a way out. I'm guessing if "the enemy" or "the competition" would take the trouble of tracking down a likely individual and making a financial offer for sensitive information, the sum would be enough to stagger even someone who wasn't in debt. It would probably come down to greed and/or intentions rather than "Whoo-hoo! I can pay off my debt!". But the "don't be in debt" rule looks good on paper. In practice, ehhh...its flawed.

    Collections Accounts Add to Your Allowed Debt Amount

    There is no set figure you have to stay below in order to get and keep your security clearance. Experts estimate, however, that $3500 is the general figure to shoot for.

    But what's more important that the amount of debt you carry is how you got there. For example, a reviewer will scrutinize a $500 collection account more closely than a $5000 student loan debt that you pay on time each month. Why? The collection account denotes carelessness and irresponsibility whereas the student loan account does not. Carelessness and irresponsibility are more important than the amount of debt you carry, because these factors make you a bigger security risk to your country. Thus, collections on your credit report are particularly dangerous if you're headed for a security clearance review.

    Pay Off Collections Before Your Security Clearance Review

    As much as I hate to tell anyone to pay off a collection agency, the simple fact of the matter is that, in a security clearance review, paid collections reflect far better on you than unpaid ones. Sure, it won't help your credit score and paying them doesn't result in them being removed from your credit report, but it reduces the debt load you carry and makes you less of a security risk. Keep in mind, however, that the very fact you had debts that fell into collections will count against you during your security clearance review. You may be asked to provide a written statement explaining the reasons behind the collections on your credit report.

    If you plan to pay off collections before your security review, do so at least 60 days ahead of time. This gives the collection agencies time to update your credit reports accordingly, and for you to demand that they update your report if they don't do so within 30 days. You can choose to pay at the last minute, but if you do, make sure to get a statement from the collection agency noting that fact and noting that you have a zero balance. You can show this statement to your reviewer in lieu of an updated credit report.

    Related Posts:

    Security Clearance and Bankruptcy

    Wednesday, September 7, 2011

    How Much Do Collections Hurt Your Credit Score?

    You know that collections on your credit report hurt your credit score, but how much? Probably less than you think.

    How Much Collections Hurt Your Credit Score?
    Collection accounts are derogatory entries on your credit report, but a collection account isn't like a bankruptcy or foreclosure, which are the financial equivalent of Monopoly's "Go directly to jail, do not pass Go, do not collect $200" card.

    Here's why: Your credit's already damaged. 

    When a lender charges off your delinquent debt and sells the account to a collection agency, the payments you missed and the lender's charge-off damage your credit rating. A damaged credit rating is less vulnerable to negative entries that a positive credit rating.

    No one knows the exact scoring formula, but what we do know is that a negative entry hurts someone with good credit far more than someone with bad credit. Look at these two hypothetical scenarios:

    Joe has a credit score of 750. Or, at least, he thinks he does. When Joe goes to apply for an auto loan, expecting to get an excellent interest rate, he's quoted a rate far higher than he thinks he deserves. After going home and pulling his credit report and FICO scores, Joe is shocked to learn that a collection agency has hit his credit report for a debt he wasn't even aware of – costing his credit score 120 points. 

    Jane has had numerous debt problems in the past and can't keep up with her credit card payments. She finally defaults on the balance she owes – knowing that it will end up in collections. Jane's credit score is 550 when the credit card company finally charges off the debt. Four months later a new collection appears on her credit report, but Jane isn't too worried. The new collection only costs her 30 points – bringing her credit score down to 520. 

    In Joe's case, his good credit rating caused his credit score to go into free fall from a single collection hitting his credit report while a collection hitting Jane's credit didn't have that much of an impact. The degree to which a collection hurts your credit score – and how many points you can expect to lose – is directly related to how high your credit score is when the collection agency reports the debt. The higher your are, the greater the fall. 

    Estimating the Damage Collections Do to Your Credit Rating
    As much as you'd like to know ahead of time how much damage a collection account will do to your credit rating, estimating the damage is just that: an estimate. Each piece of information on your credit report affects your score to a different degree. Thus, two people with the same credit score may have drastically different results should the same collection account for the same amount hit their reports. On average, with an average credit rating, an individual may suffer anywhere from 50 to 75 points of damage, but that's just a ballpark figure. As I stated before, everyone is different.

    Collection Amount Affects Credit Score Damage
    One thing most debtors don't realize is that the amount they owe a collection agency influences whether or not their credit scores take a nose dive once the entry hits their credit files.

    Since time out of mind Fair Isaac's credit scoring model counted all collections pretty much the same way. The scoring formula didn't differentiate between a $20 collection for an unpaid library fine and a $5000 collection for a unpaid student loan. One person is clearly the greater credit risk than the other, but the system didn't reflect that.

    With the release of FICO '08 in early 2009, the scoring formula now has a way of differentiating between consumers who have clear debt management problems and those who got nickel and dimed all the way to collections. If the original debt you owed was less than $100, the resulting collection account may show up on your credit report but it won't hurt your credit score.

    Related Posts:

    Collections on Your Credit Report

    Collection Accounts and Your FICO Score

    Credit Reporting Period vs. Statute of Limitations