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Keep Calm and Know Your Rights: What to Do When You Have an Account in Collections

July 13, 2018

Despite our best intentions, sometimes even the best of us fall behind on payments. In fact, CNN has reported that as many as one in every three American adults has debt in collections.

Unfortunately, it doesn't take much – as little as 90 days – before some companies decide to send the past-due balance to collections. And often times, the overdue payment may not even be something you are aware of, thanks to a simple snafu like not receiving a forwarded utility bill after you move, or even because an identity thief has used your name to make purchases with no intention of paying them back. (All the more reason to monitor your credit report.)

Still, while having an account in collections may be nerve-wracking, the truth is it's not the end of the world. The impact on your credit report lessens over time, and you can get your credit back on track by taking a few proactive steps. Additionally, you are actually protected by law from being harassed by debt collectors.


What does having an account in collections mean?

When an account is in collections, it means that the creditor or lender has decided to cut its losses by either turning your outstanding balance over to an internal department or by selling that debt to a third party collections agency. Any kind of unpaid debt can go to collections, including credit card debt, all types of loans (i.e. student loans, car loans, etc.), bills like utilities, and so on.

For unsecured loans, like credit cards, this not only damages your credit, but it may also lead to fines and compounding interest.

If the debt that you've defaulted on is on a secured loan, such as a car loan, you could not only have your auto repossessed and sold off in auction, but also still have the remainder of the debt you owe sold to a collections agency. 

Either way, this outstanding debt is reported on your credit report. Assuming it's valid, it will take seven years from the original delinquency date to cycle off your credit reports, according to Experian. Unfortunately, it drags down your credit score and is a red flag to potential creditors and lenders.

Fortunately, as we mentioned before, having an account in collections is only temporary, and you can take swift and decisive steps to get your credit score back on track.


What NOT to do when you have an account in collections

First off, don't panic. Regardless of how you decide to handle things, the debt will drop off your credit report after seven years, so it's by no means a life sentence.

Next, don't put things off. If you are able to pay what you owe before your creditor reports the information, you may be able to avoid the negative credit score dip. Acting quickly is equally important if you think you may be a victim of identity theft. Get to the bottom of things before the fraudster has the chance to cause any more losses.

Keep in mind that all debt isn't considered equal by all credit scoring models. For example, FICO 9 weighs medical debts in collections less heavily than other types of debts. Because of the complexities of the medical industry and the associated enormous costs for the under- or non-insured, research shows that unpaid medical bills in collections are less indicative of a person's usual financial habits. This is why FICO downgraded the influence of unpaid medical bills vs. other kinds of debt on their latest scoring model.


Additionally, FICO 9 disregards collections situations that have been fully paid off when calculating your credit score. So now more than ever before, tackling that old debt can definitely work to your benefit.


What to do when you have an account in collections

The first thing to do is take a good look at your credit report to be sure that the account that's in collections is valid. Errors on credit reports are common, and it's also possible that the account is in collections because of a billing error made by the company reporting it. As mentioned, identity theft may also be a reason for an account in collections, and there are immediate steps you can take to to rectify that problem.

Make sure that the amount they're attempting to collect is money that you actually do owe, and if it's not, dispute it right away.

Once you are clear about the circumstances, next you need to gather information about what you owe. Get a statement in writing from the debt collection agency that details the principal amount owed, plus any interest or fees so you have a clear picture.

Next, if possible, negotiate a payoff plan. Again, be sure you have the details of anything you agree upon with the collections agent in writing, so that there are no future misunderstandings. It's also worthwhile to request that the collections agency remove the account from your credit report once it's resolved; while it's not common, it does happen on occasion.

Proposing to "pay for delete" is a common strategy, although we'll warn you that it's not quite an above-board deal. Debt collectors who report to the bureaus are obligated to provide complete and accurate information, and this kind of arrangement does have an effect on the integrity of credit reporting — that's why updated scoring models like FICO 9 are taking a new approach, and leaving collections accounts out of credit score calculations.

Once you've got all your ducks in a row, get to work paying off your debt. The sooner you can get it resolved, the better.


Know your rights

Being harassed by third party collections agents is a common complaint – so common, in fact, that there are a few important laws that protect consumers from becoming a target.

First there's the Fair Debt Collection Practices Act (FDCPA), which is the premiere federal law that governs debt collection practices. According to the Consumer Financial Protection Bureau (CFPB) , this law "prohibits debt collection companies from using abusive, unfair or deceptive practices to collect debts from you."

There are a number of illegal collections practices for third party debt collectors, including:

  • Calling you before 8:00 a.m. or after 9:00 p.m. in your time zone
  • Calling you at work, as long as the debt collector is aware your employer doesn't approve of these phone calls
  • Abusing, harassing or oppressing you in any way
  • Lying to you, which includes falsely implying that you have committed a crime
  • Using any unfair practices when trying to collect a debt
  • Concealing his or her identity as a debt collector on the phone
  • Disregarding a written request from you to cease further contact
  • Contacting you directly, and not your attorney, if requested


Please note that this regulation applies only to personal, not business, debt collection. And if you find that your rights have been violated under the FDCPA, you can file a lawsuit against the debt collector and potentially receive up to $1,000 in addition to actual damages and attorney fees. (You can report any FDCPA violations to the Consumer Financial Protection Bureau via the online complaint form.)

In addition to the FDCPA, there are other key federal laws that protect your rights as well. For example, The Fair Credit Reporting Act covers how any kind of financial matter, including debt collections, can be added to your credit report. Additionally, there are other consumer financial protection laws that protect you against unfair, deceptive, or abusive acts or practices that apply to both debt collectors and lenders/creditors alike.

Finally, you should also familiarize yourself with local regulation, too. According to NerdWallet, investigating your state's laws about the interest and fees collectors are permitted to charge is key. Once you know what your state allows/disallows, be sure to do the math on what your collector is saying you owe. If it adds up to you being overcharged, you should dispute the difference in writing.

Having an account in collections can affect not only your credit rating, but also your sanity. But you can get through this by understanding your rights and taking action to resolve your outstanding debt. Just make sure you get everything in writing, and next time, pay it before it ends up in collections.