Saturday, July 19, 2014

Can You Tell Debt Collectors That You're Dead?

Debtors have a myriad of ways to avoid paying collection agencies, but being dead has to be one of the most effective. Out of the myriad of ways debtors have to avoid having to pay debt collectors, being dead has to be one of the most effective. A debt collector could come knocking at the pearly gates, sure, but nobody would let him in.
He'd be directed to the other know, the one peppered with lawyers, IRS agents and everyone who has ever worked at a DMV?

Yep. That line.

All kidding aside, if you're carrying a heavy debt load there are some definite benefits to being dead. Depending on your state of residence, death hinders the collection process considerably--making it an appealing excuse for frustrated debtors. Although the excitement is practically oozing out of your ears at the prospect of creating your own online tombstone, you should probably take the following into consideration before you break the news of your untimely demise to any debt collectors

Debt Collectors Probably Won't Believe You're Dead Without Proof

A seasoned debt collector has heard it all. Any excuse you can come up with, he or she has already fielded. The "death" defense isn't as brilliant or unique as it may seem in your head. But sometimes the story is true. After all, people die every day (40,000 if we're to believe Blue Oyster Cult). To weed out the fakers from the actual deceased, the collection agency will probably request a death certificate. And don't bet on them waiting a reasonable amount of time for the elusive death certificate to arrive. They'll likely just continue calling and asking for you--dead or undead. 

NoteFamily members of actual deceased debtors are not required to send the collection agency a death certificate. Many just send a "my loved one passed away, do not contact us again" sort of letter which falls into the "Cease and Desist" category. So, theoretically, your failure to send the debt collector a death certificate isn't proof that you're actually still alive. 

Telling Collectors You're Dead May Constitute Fraud 

Nobody wakes up in the morning, stretches and then says, "Today I think I'll go commit some fraud so I can get me one of them swanky rooms at the County jail." Unfortunately, your seemingly innocent tactic for avoiding debt collectors could potentially land you in some serious legal trouble. 

Just to clarify, I'm not saying that telling a debt collector that you're dead is blatant fraud and will land you in jail. The chances of that are painfully slim. Debt collectors hear the "I'm dead" excuse more often that you think. Even if the collector, upon finding out that you are very much alive, calls the authorities and throws a Miss-Piggy-backstage calibur hissy fit, any evidence the collection agency has against you is circumstantial at best. But I have to make you aware that the possibility exists. It is possible that the debt collector can make a fraud claim and it is possible that the D.A. would move to prosecute. It is very unlikely, but it is possible

You're not truly tap-dancing with trouble unless you've created a forged death certificate to "prove" your alleged death to the collection agency. The irony here is that the consequences for the collection agency believing your story and writing you off as deceased are just as foul as the consequences you'd face in front of a judge. 

Bad Things Happen When the Credit Bureaus Think You're Dead

Once a creditor receives confirmation from your family members that you've died--usually via a death certificate--the creditor will notify the credit bureaus. The credit bureaus will then note that you are deceased. Once this occurs, you can't pull your credit and neither can lenders. All credit activity stops. I've never tried convincing the credit bureaus to bring one of my clients "back to life," but from what I've heard, reclaiming your credit when the credit bureaus think you're dead is a frustrating and nightmarish process. 

Stop Collection Calls Without Claiming to Be Dead 

No matter how simple the idea sounds in your mind, telling debt collectors that you're dead and convincing them of that fact takes some serious planning on your part. The end result? They start doggedly pursuing your next of kin (or in this case, they're doggedly pursuing you who have been, up to this point, pretending to be that next of kin). So the debt collectors are still calling and, since they've reported your death to the credit bureaus, your credit report is POOF! Gone. 

That's not the scenario you were hoping for, is it? Nope, didn't think so. If the collection calls are truly driving you insane, you can make them stop simply by sending the collection agency a cease and desist letter. (If the debt in question is still within the statute of limitations for debt collection lawsuits, make sure to only restrict debt collectors from calling you on the phone, not from contacting you in general. If you give a collector no way to contact you, its only option is to sue.) After receiving a Cease and Desist letter, federal law requires debt collectors to back off and let you peace. 

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Monday, July 14, 2014

Q&A: When the Yellowstone Supervolcano Erupts, Will My Collections Disappear?

Dear Lee,

I have two collections on my credit report and my credit isn't in good shape. I've been following the recent changes in the yellowstone supervolcano and was wondering, if it erupts what happens to my collections and the credit system as a whole? Will we all be equal then? Will credit scores and reports not exist anymore? I don't live in the midwest so I'd probably survive. I swear this is a serious question and I'm not trying to be funny. 



Let's overlook the astronomical odds against Yellowstone's supervolcano erupting and say, just for the sake of argument, that it blows tomorrow. If that happens, hundreds of thousands of people are going to die almost instantaneously. A large section of the country will be covered in more than a foot of ash and then many more people are going to die from ash inhalation, toxic gases in the air, collapsing roofs, etc. Even the parts of the country that aren't directly affected by the blast will get a dusting of ash. The supervolcano erupting will be the most catastrophic event in our recorded history.

That being said, I can pretty much promise you that your credit scores aren't going to matter once
Afterward, your credit won't matter
Yellowstone goes up in smoke. No one's going to be checking your credit for anything. The extreme loss of real estate due to the volcano is pretty much guaranteed to annihilate the banks and the economy as a whole. Getting a credit card or a mortgage is going to be laughable. These industries will probably fold. Your primary worries will be getting access to food and clean water and protecting your home and goods from desperate refugees.

Don't get me wrong, your collections won't disappear and neither will your credit report. It's just that, when a supervolcano blows and destroys half the country, no one is going to care one way or the other that you let some bills lapse. Its also possible that all credit updates would stop--causing those collections to linger on your now-irrelevant credit report forever and ever amen.

If you made the (wise) decision to pack up your toys and move to another country in the aftermath of the eruption, you still won't have to worry about those pesky collections. Although the same credit bureaus we have in the U.S. also operate in other countries, there is no international credit reporting database. Let's say, for example, that you ran off to Canada or Mexico. You'd still be working with some of the same credit bureaus, but those credit bureaus wouldn't use your U.S. credit report as a foundation. You'd have to build a brand new credit history from scratch no matter where you go.

I have to be honest with you Luke, I read this question and laughed. I was curious, however, as to what "recent events" you were referring to at Yellowstone so I looked it up. And I have to admit, now I'm a little creeped out too. But trust me on this one, when and if the supervolcano goes up, those piddly collections that are dragging down your credit rating aren't going to matter one iota. You'll have much bigger problems to deal with. We all will.

Saturday, July 12, 2014

How Much Do Medical Collections Hurt Your Credit Score?

No one, unless they're sporting a major case of Munchausen, wants to find themselves hospitalized. It's just too expensive. Even people with insurance are often responsible for co-pays and co-insurance charges that far exceed what they're able to pay. As a result, it isn't uncommon for medical debt to end up in collections. Roughly 50 million people in the U.S. are currently making payments on some form of medical debt. Many don't succeed--making medical bills the number one cause of bankruptcy in this country.

If you're one of the many Americans living paycheck to paycheck, paying off exorbitant medical bills may not be an option. Ignore your medical debt, however, and it will eventually end up in collections and damage your credit scores. This is the choice that thousands of Americans are faced with: go without necessities in order to make payments on medical debt or let their credit scores take a hit.

How Do Unpaid Medical Bills Affect Your Credit Scores?

If you don't pay off your medical bills, the doctor or hospital you owe will eventually turn your account over to a collection agency. The collection agency's task is to collect as much of the debt as possible. The collection agency keeps a percentage of whatever they collect as payment for their services.
A medical emergency may cost you your good credit.

Hospitals and doctors' offices don't report your debts to the credit bureaus. Even if you set up a payment plan and faithfully adhere to that plan, the payments you make toward your medical bills don't show up on your credit report and help boost your credit scores. As unfair as it sounds, the only impact medical debt can have on your credit report is a negative one. Collection agencies routinely report their accounts to the credit bureaus. Collection accounts are always negative and will significantly damage your credit scores. Paying off the debt doesn't change this. Paid medical collections are just as damaging to your credit rating as unpaid ones.

How Much Medical Collections Hurt Your Credit Scores

The affect any item--positive or negative--has on your credit scores depends on how good or bad your credit is when the item initially appears on your report. The better your scores are when a medical collection appears on your report, the more credit points you'll lose. I'll give you some ballpark figures, but none of this is set in stone. In other words, your mileage may vary.

On average, a collection account of any variety will cost your credit score about 100 points. If you have excellent credit, expect your scores to take a bigger hit. The opposite, of course, is true for those with bad credit. If your credit is already in shambles, you may lose only 50 points--sometimes less. Time also plays a big role in the impact a medical collection has on your scores. The older a collection account is, the less it affects your credit.

How Long Does Medical Debt Stay on Your Credit Report?

Medical collections remain on your credit report for seven years. The original delinquency date generally won't show up on your credit report. What will show up is the date the collection agency first reported your medical debt to the credit bureaus. That date has no impact whatsoever on the date the credit bureaus must remove the item. The date of removal is set in stone regardless of what state you live in or whether or not you've ever made a payment on the debt.

The exception to this rule is if the collection agency sues you and wins a judgment. A judgment will remain on your credit report for either the amount of time that the judgment is enforceable in your state or seven years, whichever period is longer. In addition to giving the collection agency a wider range of debt recovery options, judgments also do significant damage to your credit rating.

Medical Collections Often Carry Less Weight With Lenders

Now for the good news. (Didn't think there was any of that, did you?) Lenders who pull and review your full credit history often place less importance on medical collections than other types of collection accounts. This is because a medical collection on your credit report doesn't scream "I'm financially irresponsible!" like, say, a defaulted credit card. Lenders know that medical emergencies are out of your control. Thus, even though the medical debt shows up on your credit report and hurts your scores, it may not be an obstacle with some lenders.

There are exceptions to this rule as well. If the debt is still within your state's statute of limitations, your lender has the right to turn down your application until you either pay off the debt or the statute of limitations passes. This is nothing more than the lender protecting its own interests. After all, no lender wants to finance an item that can be liened or seized due to an unpaid medical collection.

Related Posts:

Can a Doctor or Hospital Send Medical Bills Directly to Collections Without Notifying You?

Keeping Medical Debt Out of Collections and Off Your Credit Report

Debt Collection Lawsuit Statute of Limitations By State

Saturday, July 5, 2014

Why Paying Off Collections Doesn't Improve Your Credit Score

Debtors are often shocked to learn that paying off collections doesn't improve credit scores. Your credit
report will reflect the payment, but a collection is always a negative entry regardless of how much--if any--of the debt you've paid off. Understanding how the credit scoring system works is crucial to understanding why paid collections are just as bad as unpaid collections.

Credit Scoring and Why Paying Off Collections Doesn't Matter

The FICO scoring system--the most widely used by lenders in this country--exists solely to help lenders evaluate an applicant's level of risk. Can you imagine how much money banks and credit card companies would lose if there was no credit scoring system in place? Every single time they wrote a loan or extended credit to an individual they'd be playing financial Russian roulette. The FICO credit scoring system was born to help lenders maximize profits by lowering risk.

The logic works like this: You wouldn't have a collection on your credit report if you were financially reliable (mistakes happen, this is just the general rationale). A collection indicates that you're having money troubles or are unreliable in general. If either of those assumptions are true, that makes you a much higher risk to new lenders and creditors. In order to provide lenders with the most accurate risk-assessment possible, the FICO credit scoring system docks your credit scores accordingly.

Paying off collections doesn't improve your credit report because collections are always negative. Unlike a credit card or loan account which can be a positive credit entry if you pay your bills on time or a negative credit entry if you don't, a collection account can't swing either way. Once it hits your credit report it deals the maximum amount of damage it can, and paying it off doesn't help you. You could argue that the very act of paying off the collection debt demonstrates responsibility and that your credit scores should increase as a result (and I'd agree with you), but that simply isn't the way the system works.

Credit Scores Improve Over Time Whether You Pay Collections or Not 

Fortunately, this dark cloud of debt collection has a silver lining. Collections don't hurt your credit forever. The FICO credit system takes the age of your credit report entries into account. The more recent an item is, the more relevant it is to your current creditworthiness. As time passes, both good and bad habits can change. This makes the most recent credit entries the most accurate. As such, they carry a greater weight during the scoring process.

This is good news for you if you're trying to rebuild your credit after a collection. Time is your friend. As long as you practice good debt management habits and keep your debt in check, your credit scores will gradually improve in time--whether you pay off the collection agency or whether you don't.

Credit Scores Improve After Collections Are Removed From Your Credit Report 

Once the credit bureaus remove collections from your credit report, you'll generally see a marked increase your credit scores. The FCRA states that collections must be removed seven years from the date the original creditor's debt went delinquent. The delinquency date is usually considered to be the day your original debt went unpaid for 180 days. It doesn't matter how long the collection has been on your report. It's removal rests on the original debt's delinquency. The credit bureaus can remove collections, however, for any of the following reasons:

  • The 7-year credit reporting period has expired
  • The collection is the result of identity theft
  • The consumer successfully disputes the debt's accuracy with the credit bureaus
  • The collection agency removes the entry in exchange for payment
  • The consumer sues the collection agency for reporting incorrect information and wins 

How Collectors Use the Threat of Credit Damage to Make You Pay

If most consumers realized that paying off collections wouldn't improve their credit scores, many would opt to withhold those payments and put them to better use. Collection agencies are all too familiar with this fact. Because of this, collection letters often note that, if you pay the debt, "your credit report will be updated." This is misleading. The average consumer believes that this means paying the debt will improve his credit rating. In reality, all the collection agency does is update the debt's status to "paid" or "settled." This doesn't improve your credit scores.

Debt collectors also use this angle on the telephone. It isn't uncommon for a debt collector to try to convince a debtor to pay up by using a "but what about your credit?" argument. If the collection agency has already reported the debt to the credit bureaus, the damage is done. The "but what about your credit?" angle deceives the debtor into thinking that paying off the collection will lessen or even undo credit damage that has already occured. This, of course, is untrue.

When Paying Off Collections is a Good Idea

Although paying collections doesn't improve your credit score, your credit report will reflect the fact that you paid the debt. While some lenders see collections as negative no matter what, others will see the fact that you paid the collection as positive evidence that you're making an effort to keep up with your debts and be more financially responsible. Certain mortgage lenders will even require you to pay off collections before approving your mortgage loan. Paying off collection debts also prevents a whole host of negative consequences such as:

  • Debt collection lawsuits
  • Bank account garnishment
  • Wage garnishment
  • Civil Judgments
  • Property liens
  • Asset seizure

This doesn't happen to everyone. Unless the collection agency is working to collect debt on behalf of the government, the agency must sue you and win a judgment before it has the right to utilize more extreme collection methods. 

In the long run, its up to you how to manage your debts in the way you see fit. If that means ignoring collections in order to put food on the table or working overtime to pay your debts in an effort to alleviate your moral compass, so be it. Just remember that whether or not you choose t pay off collections, doing so doesn't improve your credit score. 

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Tuesday, July 1, 2014

Will Your Mortgage Lender Pull Your Credit a Second Time Before Closing?

It's no secret that your credit plays a big role in whether or not you'll get a mortgage loan approved. What many buyers don't realize, however, is that just because your initial credit check goes well that doesn't mean you're out of the woods credit-wise. Although all mortgage lenders' policies differ, its very likely that your lender will conduct a second credit check before closing.

Why Mortgage Lenders Pull Your Credit a Second Time

Your mortgage lender pulls your credit a second time for the same reason it conducted the original credit check--to ensure that you've A.) remained financially stable and reliable and B.) Not incurred any new debt that would encroach upon your ability to keep up with your new mortgage payments.

I know what you're thinking, "Isn't one credit check enough?" and the answer to that is a resounding NO. People spend long periods of time preparing their credit for that one credit check. They'll tuck away their old bad habits and work tirelessly clearing away credit blemishes in an effort to ensure high scores during the mortgage credit check. For these folks, its a bit like a bride-to-be dieting herself to insanity before her wedding. After the wedding, the pressure is off and her predilection for twinkies and fried chicken comes back with a vengeance. The same is true when it comes to credit. Once that mortgage credit check is out of the way, the pressure to perform is gone and irresponsible people often run right back to their old lets-have-fun-maxing-out-the-credit-card ways.

What Happens If You Take on New Debt Before Closing?

It isn't only irresponsible people who make mistakes between the first credit check for a mortgage and the credit inquiry the lender conducts before closing. Here's a very common scenario:

Joe paid off his wife's car years ago, but the car is starting to have problems that require expensive repairs. Joe wants to buy his wife a new car, but the couple is getting ready to apply for a mortgage loan. Joe knows that the added debt he would take on by purchasing a car would decrease his debt-to-income ratio which would affect his mortgage approval. The new car will have to wait.

Joe and his wife are approved for a $200,000 mortgage. They've chosen at house that costs $195,000. Now that the mortgage credit check is out of the way, Joe buys his wife a new car. The payments are $500 a month. Joe doesn't realize that the mortgage lender will pull his credit a second time before closing. The second credit check reveals Joe's new debt which decreases the amount he's approved for. Joe and his wife have to drop the contract on the $195,000 house they would have had no trouble buying if Joe had simply waited to buy the car.

For most people, the period of time from accepted offer to closing only lasts 30-60 days, so the danger of having credit changes significant enough to derail your mortgage approval is low. If the mortgage process is more complex, such as when you're buying a short sale, the length of time from application to closing can be much longer--making it more likely that recent financial changes will show up on your credit report and affect your pending mortgage loan.

I think its important to note here that, although last-minute credit checks before closing are still common, not every lender uses them. Loans guaranteed through Fannie Mae, for example, haven't required a second credit check for years now. Keep in mind, however, that ultimately the decision on whether to pull your credit again before closing lies with the lender. It's always wiser to behave like that second credit check is coming....just in case.

The moral of the story? Wait until you sign the closing papers and the keys are in your hand before you take on any new debt. Yes, we live in a world of instant gratification, but tread with caution. In these post-recession days, banks are still hesitant to loan money and the last thing you want to do is cheat yourself out of that mortgage you so desperately want by flunking the second credit check.

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How to Dispute and Remove Unauthorized Hard Pulls On Your Credit Report

Improving Credit Scores After Collections

Deleting Collections From Credit Reports With the "One-Two" Punch