First Connecticut Mortgage Newsletter October 2006

The Low Down on Collections

Brought to you by Reynold Nippe

Debt collection can be a scary and intimidating thing. Whether you have a debt that slipped through the cracks, unpaid medical bills, a false or expired debt reported on your credit, or a few bills you couldn't keep up with, collection can be very damaging to your credit score and can prevent you from obtaining a home loan. It's critical that you know the truth from the myths because the obvious solutions may very well be the wrong ones. Here's a quick lesson:

Surprisingly enough, it's not always right to pay a recent collection. Paying it off can actually bring down your score because it creates a "recent derogatory," a very negative label that can make your score drop by 50 to 75 or even more points. With this knowledge, you may be confused about how you can best navigate collection accounts.

Here are 7 important points I want you to know right now about the debt collection process:

1. What happens to my credit score when a debt goes to collections?
   It can really foil a home loan application. In fact, a single collection can ding your credit score up to 100 points. If you have more than one, it could take years to pull your score back up, unless it is deleted. As such, it's extremely important for you to understand the impact your credit has on your ability to get a loan. An open dialogue regarding basic credit education and the loan process can help us assess the situation and enable us to be proactive right out of the gate.
   
   
2. How and when do accounts turn into collections?
   A debt that goes unpaid for a specified period of time is considered past due and can turn into a collection. Each creditor has their own unique policy on how long a bill can be past due before they seek collection. For credit cards, it's usually after the client reaches 120 days past due, for medical bills, it's anywhere from 90-180 days, and for other types of accounts it varies greatly. Here are the three most common paths a collection will take:
   
   
   • Many major credit card companies have an internal collections department that will hold the debt until it expires. They will initially contact you to try to make payment arrangements, and if unsuccessful, they will charge off the debt and take a write off. The "tradeline," a derogatory item on a credit report, will show as an "Charge Off" with a past due balance.
     
     
   • If they don't have an internal collection department, some creditors will assign the debt to an outside collection agency or law firm who will pursue collection for a commission. If the initial assignee is not successful in collecting on the debt, the original creditor will recall the debt, keep it for 30-60+ days, and reassign it to another outside firm. This will go on for many years, sometimes past the expiration date (statute of limitations) of the debt if it has not been paid. The only way to stop the collection process on an expired debt is to send the creditor proof that the debt has expired. In this scenario, you can still communicate with the original creditor about the account. If it has been assigned, they will give you the contact information for the collection company that has the account. When the debt is still owned by the original creditor, only the original creditor is allowed to report the charge off to the credit bureaus, not the assigned law firm or collection agency. The trade line will show as a "Collection" with a past due balance.
     
     
   • The third and most common way to handle a collection is for the original creditor to sell the debt directly to a collection agency for pennies on the dollar. Once this happens, communication about the original debt with the original creditor stops completely. The fallout that ensues when the original creditor sells off the debt complicates an already difficult situation. Endless turmoil can arise when a consumer has to re-trace the parties and attempt to explain the problem and connect the dots with what happened and when.
     
     

   The original tradeline on the account will now show a "transferred charge off" with a $0 balance. This is where the problem of multiple collection tradelines for one account begins. Once a collection has been sold, it can be sold over and over again. But here's the catch: once the Collection Company A sells the debt to Collection Company B, Collection Company A should remove their reporting from the credit bureau report because they no longer have the right to collect the debt. However, this doesn't usually happen without a fight. Getting collection companies to remove their reporting is always a battle. And that's why consumers sometimes end up paying the same debt over and over again just to stop the harassment. As you can see, it can turn into a real mess.

3. What's the difference between the Original Creditor and a Collection Agency?
   The original creditor is much more difficult to work with because they really don't care that much about collecting. They receive a salary, unlike the collection agent who only gets paid when they collect. And, a collection agency must comply with the Fair Debt Collections Practices Act, but the original creditor is not held to that standard. So most strategies to validate and negotiate debt, or cease and desist do not work with the original creditor. It's actually in your best interest to work with a collection agency because they are always looking for fast cash. Once you start asserting your rights with validation of debt letters (discussed later), you begin to become empowered.
   
   
4. Do your research.
   Learn as much as you can about the collection agency, because in many instances:
   
   
   • A collection agency will not have a license for the state they are trying to collect in; and/or
   • They may have a suspended license-a very common occurrence.
     
     

   If either of these is the case, the collection agency is prohibited from collecting on the debt. As a result, you can request removal from the credit bureaus that are reporting the item. Furthermore, you can sue the collection agency for trying to collect under either circumstance.

5. What are your rights?
   If you have a debt that has gone into collections, I want you to know that you have certain rights to protect your credit from further damage, and rights to protect yourself.

   The Fair Debt Collection Practices Act (FDCPA), 15 U.S.C.1692 is a federal statute that prohibits a debt collector from using certain collection methods in an attempt to collect a debt. I encourage you to read the Act, and ask me any questions you may have about it. Go to http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm to download the Act now.

   In summary, the Fair Debt Collection Practices Act states:

   • You cannot be harassed
   • They cannot tell third parties about the debt
   • They cannot call you after 9pm or before 8am
   • They cannot threaten you or use scare tactics
   • They cannot legally sue you for an expired debt
   • They cannot contact you once you put them on notice not to
   • They must be able to verify the validity of the debt (see below)
     
     

   The Fair Debt Collection Practices Act (FDCPA) Section 813. Civil Liability, [15 U.S.C.1692] also stipulates terms under which you can sue a collection agency. Here are some:

   • Harassment
   • Pretending to be a government agency
   • Making threats of any type, especially false threats
   • Refusing to following the validation of debt process
   • Continuing to report a disputed debt
   • Suing you in a country or state other than where the contract was signed or where you currently live
   
   People fail to meet their credit obligations for a variety of reasons. The reasons can range from over-extension of finances to unemployment and illness. Whatever the reason, every person is protected by the federal Fair Debt Collection Practices Act. Congress passed this act to protect consumers like you from harassment by debt collectors. Personal, family, and household debts are covered under the act. This includes money owed for the purchase of an automobile, medical care, or charge accounts.

   I want you to know that you do have rights when it comes to how you are treated and what can and can't be done during the collections process. Not only do I want to help you understand how credit works, I want to help prevent you from becoming a victim of the credit system. Part of my goal is to arm you with the education and tools you need to manage all of your credit issues from a position of strength.

6. Statute of Limitations vs. 7 Year Rule
   Each state has a statute of limitations on time legally allowed to enforce a debt. In some states, it's 3 years for an open-ended contract (i.e., credit cards), and 6 years for a written contract. When the statute starts, also depends on the state, but in most instances it begins as of the date of last payment or date of default. HOWEVER, if you have an expired debt and you make payment on it, or make a written promise to pay it, you will renew the statute. This is a terrible mistake made every day by consumers who just want to get collectors off of their backs. I want to make sure you understand this statute so that you can avoid doing anything that will complicate your dream of obtaining a home loan.

Once the statute has run, the debt is "expired." This means that the creditor can no longer try to collect it. However, despite the fact that statute has expired, the debt can remain on your credit report for 7 years as a charge off, and with a balance. This is when negotiations with the creditor to have the item deleted early can really pay off. The way to handle this is to raise the issue that the Statute of Limitations has run out, and then negotiate to pay 20-30 cents on the dollar for FULL DELETION. Don't sign anything or make any promises to pay the debt until the creditor has first presented you with their offer to delete in writing.

To check what the statute of limitations are for your state, visit your State Attorney General's Office at www.naag.org.

1. Validation of Debt (VOD)
   Validation of Debt is the single greatest tool you can use to deal with collectors, and it should be used before paying or negotiating a payoff for any charge-off or collection.

   Per Title 15, Chapter 41, Sec. 1609-1692g of the Fair Debt Collection Practices Act, you are entitled to request that debt that has gone to collections be validated. VOD is a formal request for proof that the debt is actually owed by you-in the amount stated, incurred at the time stated, and for the services stated. VOD can be especially helpful if there are errors on your credit report that need to be removed. The importance of VOD cannot be overstated.

   When a collection appears on your credit report, or when you are contacted by a collection agency, a VOD letter should be sent immediately. Timing is critical because "no response" from you can and will be construed as an admission of a valid debt, making it much more difficult to dispute. Here is some sample VOD Letter language:

Re: Creditor Name - Account #
SS#

Dear Collection Agency:

According to the Federal Fair Debt Collection Practices Act, I have a right to have the above debt validated. I have to date, received no proof that I owe your company a debt and am requesting that you forward all proper documentation listed below to me proving this alleged debt.

Also, it is a violation for any debt collector to pursue collection activity on an account without notifying the debtor in writing within 5 days after any communication. Additionally I am allowed 30 days to dispute the validity of the debt.

The proof requested is as follows:

1. Date you purchased debt
2. Amount you paid for said debt
3. Date of last payment/activity if any
4. Creditors full name and address
5. All records pertaining to actual debt to prove validity.


If you are unable to provide me with proper proof then you must stop attempting to collect this alleged debt. If you continue to claim I owe a debt that you cannot confirm then you will be in direct violation of the FDCPA. Additionally, any attempt on your part to report this alleged debt to my credit reports will be a violation of the Fair Credit Reporting Act.

Please forward your documentation to me upon receipt of this certified letter. Please note that a print out or bill from you is not considered valid or absolute proof of the debt's existence.

Sincerely,

Make sure the letter is sent certified mail and that you obtain the proof of delivery for your file. Keep a copy of the letter and any other communication you may have from the collector.

Allow the collection agency 30 days to reply, and be sure to review their proof closely because in most instances they will try to send you everything but what you ask for in your VOD letter. Accept nothing less than absolute proof.

In the meantime, send a copy of the VOD letter and proof of delivery ONLY to the credit bureaus that are reporting the item. And if you do not hear back from the collection agency in 30 days, send another letter to the credit bureaus asking them to remove the item from you report based upon the fact that the debt was never validated by the collection agency. If they cannot prove it, they cannot collect it or report it.

I cannot stress enough the importance of validating debt. It buys time, gets the collectors off your back, and wipes out debts that are invalid and/or inaccurately reported.

TO PAY OR NOT TO PAY - HOW DO YOU KNOW?

If a VALID collection pops up on your credit report, don't necessarily pay off the debt right away. The last thing you want is to pay off all your past due debts while applying for a home loan. You will be disappointed when you realize that paying off those debts was actually a bad idea, unless you have negotiated a deletion letter from the creditor or collection agency. It seems counterintuitive to not satisfy past-due debts before securing a major loan such as a mortgage. But if debts that have been listed as past due are paid, it then makes the debt "valid," legitimizing the debt on your credit report. As a result, it becomes a recent derogatory that lowers your credit score.

I am not suggesting that you not pay your debts. On the contrary, you want to be current on all your bills, unless you have debts that have gone into collections. In this case, it's a matter of when and how to pay your collection debt so that it doesn't prohibit you from getting a loan. Here is some information that will help you decide when and how to pay valid collection debts:

• When should a VALIDATED collection be paid? If a collection is more than 12 months old, then paying it off will bring the score down by making it a recent derogatory account. Unless you can negotiate a deletion letter from the collection agency, it is best to pay a collection after escrow with the following exceptions: a) the creditor or collection agency is going to take legal action; or b) the account is stopping loan approval. In this case, negotiate for full deletion.
  
  
• How should a VALIDATED collection be paid? Negotiate a deletion letter or it will do you no good to pay the debt. Let the collector know that you are credit savvy and that you know without deletion, there is no benefit to you in paying the debt. It takes persistence, and patience, but it will be well worth it in the end. Once you come to an agreement on the phone with the collection agency, they will fax you a letter stating that they will delete the item (NOT UPDATE) from your three credit reports if you pay a certain amount by a certain date. Sometimes you have to pay a higher price, but always start with 30 cents on the dollar.

In conclusion:

The best credit advice I can give you regarding collections is to always be proactive. It is critical that you stay on top of your bills both financially and organizationally. This way you can prevent ever having to deal with collections. However, it is also important to understand that strange things can happen in the credit world, and even people with great credit histories can get thrown for a loop sometimes. Unresolved medical bills, statements sent to the wrong addresses, bills that are misplaced or mislabeled can force collections calls for people with otherwise stellar credit history. This is why it is so crucial to continually educate yourself about credit.

I am here to help you with your credit needs. Please come to me with any concerns or questions you may have about your credit. If we can talk openly about any credit issues you may be concerned about, we will be better equipped to deal with them efficiently. I hope to do all I can for you to make the home-buying experience a happy one.

All the best.