Mortgage Debt Re-aged and Disputes Marked Frivolous

Lee,

I am a victim of re-aging. I opened a 1st and 2nd mortgage on a home in 2002. By 2003 I had lost my job and my home to foreclosure. My last payment was made February of 2003. The 1st mortgage fell off my credit in 2010. The 2nd has been re-aged a number of times over the last 5 years. The first time was after the loan was transferred from BofA (BAC Home Loans) to Litton Loan Servicing. Litton changed the date to show my first delinquency in 2007. I disputed this in 2010 only to have them change the date again to May of 2010. The loan was then transferred to Ocwen. After disputing directly with Ocwen, they changed the date to November of 2010. 

I have disputed this so many times that even the CRA's refuse to allow me to continue to dispute it. I have even provided the CRA's and Ocwen copies of the official payment records from BofA. Ocwen will not respond to my certified letters, and the CRA's tell me that I have no BofA accounts. Because the account number was changed when Litton took over the loan, the CRA's say it is not the same account. Worse of all, no one will help. Even numerous attorneys have been contacted, but none are interested in representing me. I had one tell me that my case would not make a good class action suit! I am not looking to make millions off of these criminals, I just want this removed from my credit so I can move on with my life. It is very frustrating, and I feel I am just spinning my wheels every time I send another certified letter, knowing it will never make a difference.

Erik

Erik,

First let me apologize for taking so long to get back to you. The holiday season is always hectic around my house. 

That being said, first let me address why your account kept updating. Each time you filed a dispute with the credit bureaus, they contacted the collection agency and asked for verification. Federal law does not govern the type of investigation the credit bureaus have to conduct. Because of this, they'll generally fax over a sheet saying "Is the information your reported accurate?" The collection agency faxes back a response of "Yes" and the debt is verified. Period. No proof required. 

Now, each time you made that dispute and the credit bureaus attempted to verify, the counted as activity on your account and the date on your credit report updated accordingly. BUT..and this is a very big "but." that should have no bearing whatsoever on the debt's reporting period. The reporting period is set in stone at 7 years from the date your account first went 180 days delinquent  No amount of payments or disputes can change this date. 

The credit reporting agencies are refusing to help you because they have marked your dispute over this particular issues as "frivolous." Once upon a time people could clean up accurate negative information from their credit reports by disputing the same entry over and over and over again. Somewhere along the line, sooner or later, someone would make a mistake. Either the credit bureau computer system would miscategorize the dispute or the collection agency would neglect to respond, or any number of things. This resulted in the credit bureaus deleting the report. The only trick was to dispute maniacally until the entry disappeared. This is why all those "Clean up your credit report!" companies seemed to pop up overnight about ten years ago. It was a booming business. 

To prevent this bit of gray-area fraud from continuing, the federal government updated the Fair Credit Reporting Act to give the credit bureaus the right to deem repeated disputes "frivolous" and refuse to investigate them. Unfortunately, this makes fixing errors extremely difficult for the honest people out there who just want what they're legally entitled to – an accurate credit history. This has always been a source of serious frustration for me as, nine times out of ten, my clients don't come to me until they've dug an extremely deep hole for themselves. If the item was still disputable, I can be of much more assistance by telling the individual exactly how to structure their letter, what to say and what no to say, what documents to send, etc. In many cases, however, once the credit bureaus say a dispute is frivolous, my hands are tied. 

That being said, you can try requesting a Method of Verification. I'm linking a website below that explains the process in depth. It may not be successful after having your dispute marked "frivolous" (and TransUnion is going to be the hard one to work with here) but try it anyway. The important thing is to create a paper trail. 

Method of Verification 

Now, the credit bureau says that you don't have a Bank of America account and are using this as a reason to leave this inaccurate information on your credit report. The irony here is that no collection account should remain on a credit report longer than the original creditor's entry. If it does so, its been re-aged. This is the very reason your are disputing the debt, yet the credit bureaus say that the very information that supports your dispute (the lack of a Bank of America account on your credit report) is what proves your dispute is frivolous. 

Oh, and accounts are assigned a new number when they change hands. The credit bureaus know this and are using the different account number as a cheap reason to try to blow you off. 

The good news here is that you can prove to the credit bureaus that the original creditor was Bank of America. The Fair Debt Collection Practices Act notes the following: 

Within five days after the initial communication with a 
consumer in connection with the collection of any debt, 
a debt collector shall, unless the following information is 
contained in the initial communication or the consumer has 
paid the debt, send the consumer a written notice containing—

(1) the amount of the debt; 
(2) the name of the creditor to whom the debt is owed; 

So, when you filed your validation or dispute with the collector (and I am assuming that you did) it should have sent you a written response noting that Bank of America was the original creditor. If it did, you can use this information to try and shove the credit bureaus convoluted reasoning right down their throats. If it didn't, it violated the FDCPA and you have the right to sue.

The problem with suing is that lawyers are, in general, complete and utter jerks. The FDCPA restricts monetary awards for violations to $1000 or less. This means that, if the lawyer charges based on what you collect, helping you clean up credit report errors just isn't a profitable use of his time. But don't worry about finding a lawyer just yet. The person you need to try to reach first isn't your average attorney – its your state's attorney general. 

Request the method of verification first and see what they say. Then write a letter to your attorney general. Make it nice and professional. Explain everything that has happened. Explain that you merely want the credit bureaus to do what the law says they have to do. Instead, not that you – an honest consumer with a valid problem – are being turned away and you have nowhere else to go for help. Make it very clear that your disputes are not frivolous. Send copies of all the letters you've sent and the responses you've received and ask nicely if someone in the attorney general's office can help you. You'd be surprised how quickly a single call to the credit bureaus from your attorney general can turn things around. 

You can also hire an attorney to write a letter to the credit bureaus demanding the method of verification and making it clear that your dispute is valid and why. In the same way, you can have the attorney draft a letter to the collector and let them know that the account is beyond the federal reporting period and must be deleted immediately as re-aging accounts is a violation of federal law. The attorney doesn't have to represent you. He merely has a draft a few letters. Last I checked this ran about $30 per letter in my area. Prices may vary but if you can find a lawyer willing to do this its well worth it.  

If the attorney general can't or won't help, a lawsuit may be your last resort. You can sue both the collector (lawyers must abide by the FDCPA too, so they count as collectors) and the credit bureaus. You don't have to have an attorney, but having one helps you immensely. Even if you know the law inside and out, collectors will be more likely to give you what you want in an effort to stay out of court if they know you have an attorney and a good shot at winning the case. 

Best of luck to you,
Lee 

How Long Do Paid and Unpaid Tax Liens Stay on Your Credit Report?

Yesterday we talked about tax liens, how they work and what they do to your credit scores. Today we are going to talk about how long tax liens remain on your credit report and how to get them removed. If you're coming in late and want to start at the beginning, I am including a link to yesterday's post at the bottom of this one. You'll also find a link in the right-hand column.

Ok, moving on.

How Long Do Tax Liens Stay On Your Credit Report?

If you're even the slightest bit credit-savvy, you already know that the vast majority of negative information, such as collections, foreclosures, Chapter 13 bankruptcies, etc., must be removed from your credit report after seven years. There is no extension period. The reporting period is the reporting period. Once it expires, federal law requires the credit bureau to remove the obsolete item.

Sometimes tax liens adhere to this rule and sometimes they don't. It depends on their status. Lets look at what the Fair Credit Reporting Act has to say about tax liens:

Information excluded from consumer reports.  Except as authorized under subsection (b) of this section, no consumer reporting agency may make any consumer report containing any of the following items of information: ....

...Paid tax liens which, from date of payment, antedate the report by more than seven
years.

Sounds promising, right? Seven years of credit damage and then you're done. But not so fast...Read that one more time. It says paid tax liens. A paid tax lien will be on your credit report for seven years from the date you paid it off. That means, if you're making payments, the clock doesn't start on the credit reporting period until you make that last payment.

But tax liens aren't like collection accounts. You can't just ignore a tax lien and expect it to fall off your credit report in seven years.

How Long Do Unpaid Tax Liens Stay On Your Credit Report?

Government debts have this nasty habit of not adhering to the standard seven-year reporting period for debt, and unpaid federal tax liens are no exception. How long do they stay on your credit report? Are you ready for this?

There is no set reporting period for unpaid tax liens on your credit report. 

Tax liens are starting to smell a whole lot like defaulted federal student loans, aren't they? So, theoretically  if you leave your tax lien unpaid, it can stick around on your credit report forever. Of course, that doesn't happen. The credit bureaus will begrudgingly remove those old, unpaid tax liens after about 15 years. Because the time frame is so long, you'll have to keep a close eye on your tax liens. They're likely to get overlooked when removal time rolls around. Yes, I know its done via computer, but that computer system seems to make heinous mistakes on a regular basis, so betting the farm that the credit bureaus will remove your tax lien after a pre-set period of time isn't wise.

An unpaid tax lien is a prison sentence for your credit.

I don't know how successful a dispute would be. I've never worked with anyone who attempted to dispute an old tax lien as obsolete after 15 years, so I can't tell you whether the credit bureaus would be quick to remove the item or whether they'd shoot back with "unpaid tax liens can remain on your credit report indefinitely. There is no reporting period." and then let those liens hang around for an extra six months or so before quietly deleting them from your credit history.

The Ten-Year Statute of Limitations for Tax Debt

Please don't get the 10-year statute of limitations for tax debt confused with the credit reporting period for tax liens. I see this a lot. The 10-year statute of limitations for tax debt refers to the amount of time the IRS has to enforce its lien (i.e. seize your assets). It has no bearing whatsoever on credit reporting periods and how long a paid or unpaid tax lien will remain on your credit report.

Related Posts:

What Does a Tax Lien Do To Your Credit Score?

Can a Collection Agency Take My Tax Refund?

Reader Question: Disputing Re-aged Debt With Collection Agency

Hi Lee,

I wrote last December regarding an old $250 collection. I had contacted the CA to attempt a PFD and all they did at the time was verify the debt. It seems the mortgage company overlooked it (the rest of my credit is excellent) and I closed on a mortgage in April.

I applied for a business line of credit with my bank a month ago and it was declined and it turns out the reason is the the CA re-aged the debt and rather than showing the original date of April 2007, they are showing a much more recent date in conjunction with another date in 12/2011 when I contacted them regarding the PFD.

My understanding is that re-aging is illegal and I can take action to remove it from my credit report. Do you have any advice if I should contact the credit bureaus directly or contact the CA again?

Thanks so much for all of your advice,
Sheryl

Sheryl,

I remember that, and I am extremely happy for you that you found a good mortgage company that didn't bat an eye at your collection. It's okay to name names here, and having the name of the collection agency would be helpful since I try to keep an eye on which major collectors participate in which types of collection activity, but regardless of who it was re-aging collection accounts is illegal. Period.

Here's what I think may be happening: You're probably looking at the "date reported" or "date last reported" or however it may appear on your report. The company can update their reports at any time. Each time they update information with the credit bureaus, the date of the update appears on your credit report. This is normal and perfectly legal. It has no impact on the date of first delinquency. The collection account must be removed seven years from that date. 

Unfortunately, I have noticed that, over the past few years, more and more collection accounts just don't show the date of first delinquency. The only dates that appear are the date the account was most recently reported and the projected removal date. This is infuriating to me because not only does it confuse consumers, it makes it nearly impossible to tell whether or not a collector is re-aging its reports. 

I think what happened is that, when you inquired about a PFD, you resuscitated the collection agency's interest in you. In their eyes, if you were offering to make a deal, that means you have the money to pay! Hooray! And the first thing they do is update your account with the credit bureaus. This hurts you and they know it. The more recently an account, any account, is updated, the more impact it has on your credit scores. Recent items have the greatest influence. As an entry ages, so too does its importance decline in the credit scoring formula. When you contacted the collection agency about making a payment, the collector immediately went into guerrilla mode and updated your credit report. This hurt your credit scores and resulted in your credit application being denied.   

Now, what I want you to do is to look at your recent copy of your credit report. If it says "Report date" or something of that nature, the account likely was just updated rather than re-aged. If your credit report shows a "removal date" on the right hand side and in the upper corner of the tradeline, that's the date you want to focus on. Compare the removal date from your previous report to your current one. If the dates are the same, your account has just been updated, it hasn't been re-aged. 

If the removal date has changed, however, then your account has been re-aged and its time to play hardball. 

I can't give you legal advice, but I can tell you what *I* would do in this situation. If I knew for a fact a debt of mine had been re-aged by a collection agency I would not go crying to the credit bureaus –not yet. The credit bureaus are always a last resort. 

The first thing I'd do is make a copy of the sheet of both my current and previous credit report. I would then black out all of the information on the page other than the collection agency's tradeline. Granted, they have the right to access your credit report anyway but still, why help? I would then circle the questionable dates and send the collection agency a letter stating that re-aging debt beyond its original reporting period is a violation of federal law per Section 605 of the Fair Credit Reporting Act. I would also point out that I am well within my rights to file a lawsuit for the violation and demand that the collection agency remove the entry within 30 days of receiving my letter lest I do just that. I'd then keep a close eye on my credit records to make sure they comply. 

And for a measely $250, they'd be crazy not to. 

If they didn't comply, I'd visit my friendly neighborhood attorney and pay him whatever his going rate is to draft a letter (last time I checked this ran around $30, but that could vary depending on the attorney and the area) notifying the collection agency, again, that it is in violation of federal law and must remove the offending report lest it face legal action. Semi-threatening letters on an attorney's letterhead have a way of getting noticed. 

If the collection agency still did not comply, I'd send the same information to the credit bureaus (no need to black out info this time) and a letter notifying the credit bureaus that this account has clearly been re-aged, is in violation of Section 605 of the Fair Credit Reporting Act, and must be removed. Always cite the laws. Take my word for it that the majority of representatives working the phones and doing customer service work for the credit bureaus have very limited knowledge, if any, regarding the actual laws they are supposed to be enforcing. 

Because disputes are reduced to a code and fed through a computer system, I might also include this in my credit bureau letter: 

This is not a dispute. This is a report of illegal activity and a request for removal of said illegal report. 

After all, the credit bureaus are about as competent with consumer disputes as a kindergartner is with cooking dinner. They can do it, but you have to walk them through it and supervise every step of the way. Oh, and never, ever forget to send everything CRRR. Credit bureaus and collection agencies alike love to pretend they never received things – especially if those things would require them to take more action than merely the touch of a button. 

Sheryl, I sincerely hope that if your account has been illegally re-aged by the collection agency you don't have to take this many steps. Keep me posted as to how this works out for you. I am genuinely curious. 

Best of Luck,

Lee 

What Does a Tax Lien Do To Your Credit Score?

The IRS is watching...

If you're like myself and not one of those lucky people who gets money back at tax time and instead find yourself facing a bill every year, putting aside the funds to pay it is mandatory. If you don't pay your federal tax debt in full or arrange a payment plan with the IRS, you'll soon find yourself looking down the barrel of a smokin' tax lien. A tax lien is a financial Godzilla, smashing through your assets and leaving you in a state of panic. It also has a considerably negative effect on your credit scores.

What Is a Tax Lien?

A tax lien is a blanket lien. When a regular creditor gets a judgment against you, it can file its judgment with the appropriate government office in your state and then place a lien against property you own, such as your home or car. Then you're stuck. You can't sell the asset without first paying off the lien.

IRS liens work a little differently. For starters, they don't have to sue you. If you don't pay your tax debt immediately, you'll get a letter from the IRS giving you ten days (yep, ten days!) to make some sort of payment arrangement before the IRS files a tax lien. Once the tax lien is filed, it attaches to all of your assets automatically. It also shows up on your credit report.

For more information about tax liens in general, visit the IRS and read Understanding a Federal Tax Lien.

How Much Does a Tax Lien Hurt Your Credit Score?

A tax lien is a public record, like a bankruptcy or civil judgment. Public records almost always have a negative effect on your credit scores. Like every other negative credit entry, the degree to which a tax lien hurts your credit depends on how high your credit score is when it hits your report.

Do it right!

What makes tax liens so damaging to most consumers' credit scores is the fact that a tax lien comes out of nowhere. Other negative entries generally have "warning" entries that prevent them from having the full negative effect on your credit scores. Collection accounts, for example, generally do not appear on your credit report until the original creditor has reported 180 days' of missed payments to the credit bureaus. This brings your credit score down to the point that a collection account doesn't have the full negative effect that it could have. Remember, the lower your credit score, the less negative entries affect your credit rating.

In general, you stand to lose about 100 points – maybe more if you have a particularly high credit score – when a federal tax lien hits your credit report.

Tax Liens and Foreclosure 

Most judgment creditors that hold a lien against your assets aren't actually going to seize your property. It's a long story as to why these creditors would rather hold your lien that call it due, but you generally have little to fear from collection liens and mechanics' liens. Tax liens are another ballgame.

The more equity you have in your home, the more attractive a tax foreclosure is to the IRS. They can and do seize the homes and cars of individuals who owe unpaid taxes. The moral of the story here? Do whatever you have to do to pay your federal tax debt and keep a tax lien off your credit report. Not only will it severely damage your credit score, it could leave you homeless.

How to Get Real Free Credit Report Without a Credit Card

Let me tell you what makes me sick. Real sick. Websites that advertise free credit reports but won't give them to you unless you provide your credit card information. Yes, I'm looking at you credit bureaus.

You don't need a credit card for a credit report

These websites are everywhere. They're, of course, after your money. You see, you can only access that free credit report by agreeing to sign up for some service. You can cancel at any time, but the website (yep, credit bureaus included) is banking on the fact that you'll forget and they'll get to charge your credit card for a couple of months before you wise up to the scam and cancel the service.

That is not what the government had in mind when it promised consumers a free copy of their credit reports once each year.

Lucky for you, there is a way to get your free credit report without providing your credit card information. You wouldn't believe the number of people out there who think they don't get to pull and review free copies of their credit reports because they don't have a credit card. That is how prevalent this BS has become! It's twisted, immoral, unethical and just plain wrong.

AnnualCreditReport.com.

There. It's the only website that will provide you with a copy of your credit report without demanding that you provide your credit card number. The Federal Trade Commission backs this website as the only legitimate "no credit card required" free credit report service. Ironically, the credit bureaus work hand in hand with AnnualCreditReport.com to provide this service, yet you can visit any of the three credit bureaus' website and also get a "free" credit report...of course, you have to provide your credit card number first.

Collection Agency Will Sell Your Unpaid Balance After Debt Settlement

One of the tricks in every debt collector's arsenal is offering you a debt settlement. They'll start out high and reduce the amount as time goes by and you don't play ball. If the debt is particularly old, the collector may agree to settle for a paltry sum. Either way, you can rest assured that if you have an account in collections you'll get a debt settlement offer sooner or later. If you plan on taking that debt settlement offer, however, you need to be aware of the fact that the collector may just sell your account to another collection agency after you pay the settlement.

Selling Accounts After Debt Settlement

Ok kids, let me tell you how collection agencies make money. On the front end, they buy debts for pennies on the dollar from creditors and collect on the debts for far more than they paid. The way they make money on the back end, however, is far more sinister.

Here's a story that, for some of you, is all too familiar...

Julia's car was repossessed two years ago. She was left owing $3000 to the bank. The account eventually went to collections. Julia agreed to settle with AAA collection agency for $1700. She used her tax refund to pay off the settlement, breathed a sigh of relief and put the incident behind her.

Six months later Julia starts receiving phone calls from a XYZ collection agency. XYZ collection agency claims that Julia owes them $1550 for an unpaid debt. Julia has no clue what debt they are referring to. After endless phone calls and a whole lot of stress, Julia discovers that AAA collection agency accepted her $1700 settlement payment and then sold the remaining balance of $1300 to XYZ collection agency. XYZ collection agency added $250 in fees and began the collection process anew. It's also reporting the debt on her credit report. She doesn't have the money to settle the debt a second time and, even if she did, she is worried that XYZ will also sell the unpaid balance of her settlement to yet another collector.

This hometown horror happens more often than you'd think. There is no law prohibiting a collection agency from negotiating a debt settlement with you, accepting your settlement payment and then selling the unpaid balance to yet another collector. Remember, debt collectors will make money any way they possibly can. This is a lucrative way. The saddest part? They generally make very little on the debts they sell since these debts are only purchased by junk debt buyers. Unfortunately, junk debt buyers are the worst of the worst and will harass you endlessly for a debt that, technically, you don't owe anymore.

Protect Yourself From Having Your Account Sold After Settlement 

If you want to pay a collection agency's settlement offer but don't want to end up on the hook for the remaining balance somewhere down the line, there is a simple way to get around this: get it in writing. I probably use that phrase more than any other. It's crucial in this business.

Tell collectors to put it in writing.

We are accustomed to doing business with companies who play by the rules. If they say they're going to do something, they usually do it. If they don't do it, its due to an oversight and enough irate phone calls from us later, they do it. Collection agencies do not work this way. If you reach an agreement with a debt collector over the phone, demand that the company put the agreement in writing before you pay them a dime.

Now, the collector is trained to request that you make a good faith payment before the company does anything. You are going to politely decline until the collection agency draws up a good faith statement outlining the terms of the agreement. It's perfectly reasonable to tell the collector that he works for a collection agency and you don't trust them. Tell them they can email you a pdf document on company letterhead outlining the settlement terms, you'll even stay on the phone and wait. But whatever you do, don't pay first!

What to Request on Your Debt Settlement Agreement

A document outlining the amount you'll pay and when isn't enough. Your debt settlement statement has to provide you 100% protection from your account being sold to another collector after you've already paid. This, of course, is the very thing the collection agency doesn't want to give you. Why? Because they have every intention of doing just that. Don't be another victim.

Your statement from the collector should include the following:

• The amount of the settlement
• A statement from the collector noting that, once this amount is paid, your debt is satisfied. 
• A statement from the collector agreeing not to sell the remaining balance to another collector 
• The statement should be on company letterhead and signed

Be polite, but make it clear (and you'll probably have to calmly restate this over and over) that until you have that statement in your hand, you cannot make the first payment. You see, once you make that first payment, they can sue you (paying resets the statute of limitations). If I could spend my days hovering over your shoulder and protecting you from collection scams, I would. Unfortunately, I can't, and no one is going to protect your rights but you. So do it. Demanding a statement containing the terms of your debt settlement agreement is the only surefire way to prevent a collection agency from selling your debt to another collector after you've already paid.

Related Posts:

Can You Reset the Statute of Limitations on a Debt?

Send a Cease and Desist Letter to Debt Collectors

The Debt Collection Lawsuit Threat

How Much Does One Collection Affect Your Credit Score?

Few people have gone through life without making at least one financial mistake or suffering as a result of someone else's financial mistake. Collections and how they affect your credit score is just one of many examples of little mistakes that have big consequences.

Like this...but with money. Ouch.

It's the financial equivalent of an unplanned pregnancy. Whoops!

Of course, the number of points you'll lose off your credit score will vary depending on the amount of the collection and the other entries on your credit report.

How Much One Collection Affects Your Credit Score

Just try looking this up and you'll discover that getting a number, even a ballpark figure, is close to impossible (but I am going to give you ballpark figures). There are two reasons for this:

Reason # 1:  Everyone's credit is different, and just like an equation with different numbers plugged in, the impact differs depending on the length of your credit history and how high your credit score was when the collection agency reported your debt to the credit bureaus.

Reason #2:  The FICO scoring formula is the biggest trade secret since the Coca-cola formula. Even if I know the formula and exactly what was on your credit report, I probably still wouldn't be able to tell you. I haven't delved deeply into mathematics since college, so there's a better than good chance that I'd screw it up repeatedly and do nothing more than frustrate us both in the process.

Collections Hit Those With High Credit Scores the Hardest

As backwards as it may sound, it hurts your credit much more to make one small mistake after displaying years of exemplary credit behavior than to add a collection to a credit report that's already peppered with the things. Lets look at a couple of examples.

Jimmy Smith is responsible. He has steady employment, a long credit history, carries a good balance of debt and always makes his payments on time. He has a credit score of 802. A case of mistaken identity results in another Jimmy Smith's collection account for $750 appearing on his credit report. Overnight Jimmy's score drops from 802 to 687.

Jane has had a run of bad luck. After she lost her job she couldn't keep up with her debts and several of them went to collections. Her credit score is 593. When a new collection for $750 dollars appears, Jane's score drops to 561.

There is no difference in the amount of the collection that appears on both Jimmy and Jane's credit reports. The only difference is that Jimmy has a solid credit history and score while Jane's is considerably tarnished. The end result? Jimmy loses over 100 credit points while Jane loses just over 30.

Kinda seems like a punishment for good behavior, doesn't it? Keep in mind that, in most cases, your credit report will show a slew of missed payments from the original creditor before the account is ever even transferred to collections. This can and will shave points off your credit score long before a collection appears on your file.

Collections Under $100 May Not Hurt Your Credit Scores

The Fair Isaac Corporation periodically updates the scoring formula. The most recent of these updates, which occurred in 2009, changed the way the FICO scoring system evaluates collection accounts. According to FICO, a single small collection (like an unpaid library fee), doesn't make an individual a bigger default risk to banks and credit card companies. Thus, the scoring system completely ignores collections under $100.

Now, here's where things get tricky. I am hearing through the grapevine that lenders aren't using the new FICO system. I'm going to look into this further and I'll report more information when I have it. If anyone has any information about this, feel free to post a comment and share what you know.

Related Posts:

What is a Key Derogatory on Your Credit Report?

Why Credit Bureau Collection Disputes Rarely Work

Can Collection Agency Collect After Original Creditor Issues 1099 Tax Form?

Here's an unsettling little fact you may not be aware of: When a creditor writes off your debt and sells it to a collection agency, that creditor may send you a Form 1099-MISC at the end of the year. The Form 1099-MISC notes the amount of your debt that the creditor "forgave." Of course, we both know that collection agency debt is about the furthest thing from "forgiven" debt that there is, but the original creditor can get a tax break by taking uncollected debt as a tax loss. As with most things that debt collectors and creditors do, their minuscule tax break can come back to bite you in a big way.

Forgiven Debt, Form 1099-MISC and Your Taxes

When you receive a Form 1099-MISC from a creditor, that means the creditor has reported your debt, and you, to the IRS. Thus, in order to stay on the IRS' good side (and believe me, we all want to do that) you must include the debt as income on your tax return and–you guessed it– pay taxes on it.

I know what you're thinking, "Oh good. I'd rather pay a portion of the debt as tax than pay the full amount plus fees to a collection agency." But not so fast, here comes the kicker: A collection agency still has the right to collect the debt after you've received a Form 1099-MISC from the original creditor and paid taxes on the debt.

And now you're thinking I've either developed early-onset Alzheimer's or have been hittin' the bottle again. I know there are a plethora of forums posts and blogs and articles everywhere making these claims. There are an equal number saying it isn't true. After all, it just doesn't make any sense. It is true and I am going to explain to you exactly why this is.

The IRS, Taxes and Forgiven Debt

The people who shout from the rooftops that a collection agency can't legally collect after you've paid taxes on a debt are generally referring to this lovely bit of jargon from the Code of Federal Regulations:

"When collection action on a debt is suspended or terminated, the debt remains delinquent and further collection action may be pursued at a later date in accordance with the standards set forth in this chapter. When an agency discharges a debt in full or in part, further collection action is prohibited. "

Yes, that's federal code. And yes, it contains the claim that once a debtor pays taxes on a forgiven debt, that debt is no longer collectible  But what most people who find this bit of text fail to realize is that it governs the actions of government entities, not consumers and commercial creditors. There is no comparable code offering consumers the same benefit, and if it isn't in the law, it isn't enforceable.

Told you it was real.

Let me give you an example. Once upon a time in Japan a vending machine appeared in a subway tunnel. The vending machine sold, of all things, young women's used undergarments (This is too crazy for me to make up). The city immediately took action to remove the vending machine, but discovered that there were no laws on the books making such a vending machine or what it claimed to sell, illegal. The city eventually found some obscure law regarding second-hand clothing and licenses to eliminate the machine, but until then there was nothing they could do.

The same principle applies here. There is no law protecting consumers from being double-charged. As a matter of fact, there is case law supporting the practice.

Debt Buyers' Association vs. Snow

It's easy to misread the code and assume that, once a 1099-MISC is issued, all collection efforts on the debt must stop. Back in 2006, this very assumption led the Debt Buyers' Association–an agency that represents the  interests of a number of collection agencies–to file a lawsuit.

The lawsuit was simple in scope: The DBA claimed that, because the law required creditors and collectors alike that met certain requirements (I won't go over those requirements here) to send the debtor a Form 1099–MISC, this impinged on the entire collection industry. Basically, collectors faced the inevitability of not being legally permitted to collect on any debts for which a 1099 had been issued.

The court ruled that there was no reason a debt collector could not continue its collection efforts after a 1099 had been issued. And legally there isn't since, as ridiculous and unfair as the whole thing sounds, there is no law prohibiting the practice. The court noted, however, that the debt collector could send the debtor a statement informing him/her that a Form 1099-MISC had been issued because the debt met certain technical requirements, but that collection activity would continue.

How thoughtful of them.

What to Do When You Get a 1099 From a Creditor or Collection Agency

While you can just refuse to pay a collection agency and take your chances with the statute of limitations, you don't have that same freedom with the IRS. If you get a Form 1099 from a collection agency or the account's original creditor, you have to factor it into your income. Period. Whether or not to pay the collection agency what they ask (or pay the debt and subtract the amount the 1099 claim increased your tax liability) is your decision.

Why Laws Regarding Debt Collection and 1099 Tax Forms Aren't Likely to Change

I once naively believed that someday some savvy consumer was going to file a lawsuit over this claiming that, according to legal language, the 1099 could only be issued for "forgiven" debt. Thus, the debt must be forgiven as soon as the debtor pays taxes on it. It didn't take me long to realize that the collection industry has a powerful lobby effectively preventing any case law supporting the consumer's rights. In addition, politicians tend to treat debtors like pariahs, so don't expect any new laws on the books anytime soon that protect consumers from this "double-billing" on the part of creditors and collectors.

Related Posts:

Can a Collection Agency Take My Tax Refund?

Keeping Medical Debt Out of Collections and Off Your Credit Report

Nobody will deny that the cost of health care in this country is ridiculous, and the medical collections industry is booming as a result. To keep costs low and profits high, insurance companies require consumers to pay a copay each time they seek care. Many now also require you to pay a percentage of the bill, often 20% but sometimes more. So if a hospital stay costs $20,000, you would be responsible for $4000 of it. If you're like most Americans, $4000 is just as out of reach as $20,000. The end result? Your unpaid medical bills go into collections.

Avoid the frustration of collections

A 2010 study by the Association of Credit and Collection Professionals revealed that 29% of Americans have outstanding medical debt and over half that number – 16% – have been referred to collection agencies. (You can read this study yourself here.)

Medical collections hurt your credit just as much as regular collections, and once that negative collection hits your credit report, paying if off won't cause the credit bureaus to remove it. Like standard collection accounts, a medical collection will linger on your credit report for seven years. The best solution is to prevent your medical debt from going to collections in the first place.

Ask for a Medical Debt Payment Plan

Sure, doctors offices and hospitals would love to get payment in full up front, and they may even demand it in the hope that you'll pawn precious items, sell your car or cash in your kids' college funds so that you can pony up whatever crazy number they've come up with. Most health care providers, however, will agree to let you pay off your medical bills slowly over time.

Believe it or not, your doctor doesn't want to turn your debt over to a collection agency. Debt collectors don't offer their services free of charge, and most doctors prefer receiving payments in installments over having to pay a debt collector to step in and recover the debt.

Check Medicaid Eligibility

You may assume that you aren't eligible for Medicaid, but Medicaid isn't only for the utterly destitute. For example, the 2012 Medicaid guidelines note that, in a family of four, your household can bring in up to $23,050 and still qualify for Medicaid. Even better, Medicaid is retroactive for 90 days. Thus, if you get approved today, Medicaid will pay medical debts you incurred up to three months ago – keeping your hospital and doctor bills out of collections.

Keep in mind that the requirements for insuring solely children under Medicaid differ, and some states offer care plans for kids whose income requirements are considerably higher than standard Medicaid income limits. Check with your local Department of Human Resources for additional information.

Ask for the Insurance Company's Discount

Negotiate procedure costs beforehand.

Insurance companies don't pay the full fee that doctors and hospitals charge. For example, I recently received a bill for a test that my daughter had performed recently. The total cost of the test was over $6000, but the insurance's company's discount alleviated $4500 of that. If I didn't have insurance, the doctor would have simply sent me a bill for $6000 and I would have been none the wiser.

If you don't have insurance, a single test can set you back thousands. Talk to the doctor (not just the doctor's staff. Medical office staff have a tendency to be nasty and rude. I have no idea why.) and ask if he/she can arrange for you to pay only what an insurance company would pay. It's best to do this beforehand so that you can shop around for a doctor that will work with you to help you avoid medical collections.

Dispute Unpaid Insurance Claims

An old girlfriend of mine worked for an insurance company. Over dinner one night she told me, to my horror, that she'd been "written up" for approving to many claims. She and her co-workers had strict instructions to deny a certain number of claims, whether they were legitimate or not. Most people never complain. If you think your insurance company should have paid a claim and didn't, dispute it. Make sure to notify your doctor and ask that the fact that you are fighting the insurance company be put in your records. Many doctor's offices will hold off sending your bill to a collection agency for an extra 30-90 days if they know you are battling with the insurance company for payment.

Medicaid Divorce and Your Eligibility for Health Care

Note: I know that the idea of a Medicaid divorce has little to do with collection agencies. I am posting this here because, not only is it financial in nature, people struggling with collection agencies are often facing other financial issues – especially if those collection agency debts are medical in nature. 

The concept of a Medicaid divorce first popped up on my radar when a friend with a chronically-ill wife brought it up. Even with insurance, they could no longer afford the cost of her care and she would continue to need regular care for the rest of her life. My first reaction was: "Careful there dude, that reeks of fraud."

Divorce could help you qualify for Medicaid

It still reeks of fraud, but that doesn't mean it is. Not that I would point any fingers anyway. I'll tell you right now if your motivation to commit fraud is the health and well-being of your loved ones, I will be the first person to look the other way. I've said it before and I'll say it again, you do what you have to do to get by. My friend asked if I would quietly look into this issue and the potential complications. I agreed.

Lo and behold, it appears I was wrong (It does happen sometimes. Cecil Adams, I am not). Technically, divorcing to become eligible for Medicaid doesn't appear to be fraudulent. Let me tell you why:

Consumer medicaid fraud occurs when you falsify information to qualify for Medicaid. The divorce is real. Your reasons for it, well, those are your business. I was surprised to discover that "Medicaid divorce," as its now called, seems to be a relatively common retirement planning tool.

Imagine that.

How a Medicaid Divorce Works

Need a doctor? It'll cost you.

First of all, we aren't talking about protecting assets. That's a whole 'nother ballgame. We are simply talking about dissolving a marriage in order to qualify for government health care services. I will try to restrain myself from ranting about lack of cost control in the health care industry and the highway robbery that a single doctor's visit has become (grumble).

In a Medicaid divorce, both spouses file for an uncontested divorce granting the majority of property to the healthy spouse. They fill out the paperwork and  file the divorce themselves to save money. Filing fees for an uncontested divorce can range from less than $100 to over $300 depending on your state. Now that I've started looking around, I even see attorneys publicly recommending this option for cash-strapped consumers who can't afford to seek the medical care they or their children so desperately need.

Is Divorcing for Medicaid Really Necessary?

For the average couple dealing with everyday preventative health care, divorcing just to qualify for Medicaid or other government programs doesn't make much sense. The majority of people who go this route do so because they are aging and their health is deteriorating. The costs of health care go up while their incomes generally go down. For many, a Medicaid divorce is just yet another retirement-planning tool.

The elderly aren't the only ones who'd benefit, however. Individuals with major or chronic health issues may find that, even with both spouses working, their incomes are not enough to keep up with health care costs and also meet their familiy's basic needs. Thus, Medicaid divorce becomes an option.

What to Watch Out For When Seeking Health Care Through Medicaid

Sure, marriage is just a piece of paper, but that piece of paper brings with it a feeling of security. When that piece of paper is gone, the emotional and financial consequences can be dire. Here are just a few pitfalls to watch out for when contemplating ending your marriage for financial reasons:

• Trust your spouse. Remember, in many cases you're willingly handing over more than half of your shared assets. Unless you live in a community property state (which requires an even split), turning over assets to someone you're no longer married to is a big risk. Theoretically, your newly single spouse could opt to skip town with the new windfall and there would be little you could do about it. 

• Consider living arrangements. Although Medicaid is a federal service, the states have differing rules regarding its implementation. Some take the income of every individual living in your household into consideration when evaluating your eligibility. Find out exactly what your state's Medicaid eligibility requirements are beforehand. The last thing you want is to discover that you still don't qualify, divorced or not, or that your spouse must move out for you to qualify.  

•  Consider your earnings. If the person who needs to qualify for Medicaid has a full-time job that pays more than a pittance, divorcing doesn't guarantee that Medicaid will be an option. It's very possible for the ill person's income to exceed Medicaid's limits. If you have children living in the home, this helps. The more minor children you have, the more money the government will allow you to make while maintaining your Medicaid eligibility. 

While you can file for divorce without the aid of an attorney, an attorney can be extremely beneficial in helping you navigate your state's specific Medicaid eligibility requirements and determining whether a divorce would help you meet those requirements.

Can a Collection Agency Charge Fees and Interest?

It isn't uncommon for a person to owe a debt for a certain amount only to find that amount has increased significantly after the account goes into collections. Just because a debt collection practice is common, however, that doesn't mean its legal. Collection agencies can only add fees and interest charges to your debt under very specific circumstances.

What the Law Says About Collection Fees and Interest Charges

Many consumers are under the mistaken impression that federal law prohibits a collection agency from demanding fees and interest charges from the debtor. This isn't always the case. Let's take a look at Section 808 of the Fair Debt Collection Practices Act, which details collection practices that are a violation of federal law:

"The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. "

We can see here that a collection agency cannot arbitrarily decide to charge you a random fee just to pad its profit margin. Nor can it have a policy of charging fees for the same ridiculous reasons that debt settlement companies do, such as charging a fee to set up or update your account information.

Collection Agencies and Interest Charges 

We know that debt collectors cannot charge arbitrary fees, but that doesn't mean that they can't charge fees at all. A collection agency's right to tack on additional charges to your debt depends on the agreement you signed with the debt's original creditor.

If you're like most Americans, you probably don't read the fine print when you apply for a loan or credit card, or use financing to obtain goods and services. The fine print, however, almost always addresses how much – if anything – debt collectors can add to your debt.

Take credit cards for example. Credit card account agreements sometimes stipulate that interest will continue to accrue should the account fall into collections. This means, simply, that when you don't pay your credit card debt and the credit card company charges it off, the collection agency that receives the debt will pick up right where the credit card company left off – charging you interest.

Credit cards often pass collection fees on to you.

As illogical as it may seem (because, lets face it, if you couldn't pay the original debt, odds are there's no way you're going to be able to afford an even higher amount), this practice benefits both the creditor and the debt collector. If the creditor hired the collector on a contingency, the collection agency receives a percentage of the amount it collects. The higher the debt, the higher the amount the credit card company recovers and the higher the debt collector's profit. A higher debt also ensures that a debt collector can offer you a debt settlement without losing money.

General Debt Collection Fees

Collection agencies don't collect debt out of the goodness of their hearts. Quite the contrary. Creditors pay dearly for the service. Well....they used to. Recently more and more creditors are including provisions in their contracts with consumers stating that, should the debtor default, the debtor will be responsible for paying the total cost of collection. Just look at this snippet from Capital One's cardholder agreement:

"You must pay us all of our collection expenses, attorneys’ 
fees, and court costs unless the law does not allow us to 
collect these amounts. "

By passing the debt on to the consumer, creditors can save money and further increase their profit margins. Unfortunately, this also means that you may end up owing a much higher debt to the collection agency than you did to the original creditor.

Related Posts: 

Bill Collectors Demanding the Wrong Amount

Improving Credit Scores After Collections

How Landlords Pull Your Credit Reports and Scores

If you've ever rented an apartment, you know that that landlords pull your credit reports and scores before approving your application. Just like a bank or a credit card company, your landlord wants verification that you can be trusted to make payments on time. Not all landlords want the same information. Some will rent to you based on your credit scores alone without ever laying eyes on your credit report. Others aren't interested in your score, and merely want to review your credit reports to ensure that no previous landlord had to evict you in the past (yes, an eviction can show up on your credit report). But how, exactly, does a landlord pull your credit reports?

How Corporate Landlords Pull Credit Reports

Corporate landlords receive credit discounts.

You may be surprised to learn that a large number of apartment complexes in your area are owned by the same company. A large, sprawling metropolis of rental properties has greater need of a convenient way to pull applicants' credit reports. Think of it this way: if they're fielding a large number of rental applications per day, they need a fast, effective way of obtaining each applicant's credit history.

Large companies have the option of setting up a contract with the credit bureaus that allows the company to pull your credit reports directly from the source. Not all apartment complexes, however, even the truly massive ones, go this route. For a business, ordering credit reports directly from the credit bureaus is incredibly pricey – far beyond your measly $25 application fee. Corporate landlords can afford this because they receive volume discounts. The more credit reports they pull, the cheaper the cost per report.

How the Average Landlord Pulls Your Credit  Report

Some landlords pull credit through other companies.

The average apartment complex does not order enough credit reports on a regular basis to make ordering from the credit bureaus cost effective. These companies often opt to set up accounts with third-party credit providers. These third-party companies have the same deal with the credit bureaus that corporate landlords have, but because they pull a large volume of credit reports on a daily basis, their cost per report is low. By charging subscribing landlords a fee that is reasonable but exceeds the cost per report, the third-party provider makes a profit and the apartment complex gets a copy of your credit history much cheaper than it would have had it ordered the report directly from the credit bureaus.

How Private Landlords Pull Your Credit Report

The majority of rental homes are run by a property management company rather than the property owner.

Private landlords may not pull credit.

The property management company acts as the landlord; taking on the task of screening and selecting applicants, collecting the rent and scheduling the maintenance. Occasionally, however, you'll still find owners that choose to bypass property managers in lieu of handling landlord responsibilities themselves.

It isn't uncommon for a private landlord to avoid pulling your credit report and scores altogether. Even those who know how beneficial a credit history can be when making rental decisions often forego pulling the report for a variety of reasons such as:

• They don't know how
• The cost just isn't worth it. 
• They're afraid of violating privacy laws
• They don't know how to read and interpret a credit report

This makes the private landlord an ideal choice if you've had credit trouble in the past and might have trouble getting your application approved by a corporate landlord or property management company. 

Before you allow a landlord to pull your credit report, however, its important that you pull your own to find out where you stand in your hunt for rental housing. The federal government allows you three free credit reports each year: one from each credit bureau. Take advantage of that ability and avoid the nervousness of the approval process by pulling your own credit reports and scores before your landlord does.

Related Posts:

How to Get a Free Credit Report Without a Credit Card

Do Apartment Credit Checks Hurt Your Credit Score?

Improving Credit Scores After Collections

Unanswered Comments

I haven't checked this blog in quite a while. I enjoy keeping it and answering your questions, but my child has suffered some very serious health problems these past two months and I haven't focused on anything but her and the problems she's currently facing. 

When I logged in tonight I discovered that I had nearly 100 new comments chock full of questions. I want to answer your questions and give you whatever help I can, I really do, but answering all of those comments thoroughly would take days. 

So what I'm suggesting is this: If you are one of the many people who left me a comment during my absence and you have not received an answer, repeat your comment. I will receive a notification and I will do my best to answer it as soon as possible. I know some of these things are time sensitive and I apologize, but I had much more important things to focus on this past couple of months than keeping up with my blog. 

Best of luck to all of you and remember – keep fighting.