Here’s the Plan
You don't have to be a hot financial mess to have collection accounts ruining your credit. Rosemary had great credit scores until a $46 medical bill went into collections. Her scores plummeted by more than 100 points and she was turned down for a credit card.
The kicker? She had proof that she’d paid the bill — a receipt from the medical provider. "I recently moved and need a good credit rating for numerous reasons," Rosemary wrote me. "Can you please let me know what to do?"
Legitimate or not, collection accounts can wreak havoc on your finances — and dealing with collection agencies can be scary. Here's your game plan.
Know Your Rights
Federal law generally limits collections and other negative marks from showing up on credit reports past seven years, although bankruptcies can linger for up to 10 years, and a few debts (such as unpaid tax liens) can linger indefinitely.
This law, known as the Fair Debt Collection Practices Act, also outlines what third-party collection agencies can and can't legally do. If you're getting calls from collectors, you should know that among other things, they're not supposed to:
- Call late at night or early in the morning, or at your workplace if you've told them not to contact you there
- Discuss your debt with others, including neighbors or your boss
- Use obscene or profane language
- Threaten to arrest you or pretend to represent a law-enforcement agency
- Refuse to give you their agency's name and complete contact information, including address, phone number, and licensing information
What’s the Statute of Limitations?
State laws determine how much time a creditor has to sue you over money you owe. The limits range from three years for most debts to as long as 15 years (although five to six is most common).
If the statute of limitations on the debt has expired, the creditor shouldn't be able to sue you, take your wages, or put a lien on your bank account. In some states, though, you can revive or extend the statute of limitations by making partial payments on the debt or even by acknowledging that it belongs to you. That can make negotiating over old debts kind of tricky.
Nolo, the self-help legal site, has a guide to the statutes of limitations for various kinds of debt for all 50 states and the District of Columbia.
Dispute, Dispute, Dispute
Let’s say you find a collection account that shouldn’t be on your credit reports (which are available once a year free from www.annualcreditreport.com). Maybe it isn’t your debt, or it’s showing as unpaid when you paid it, or it stems from a debt that’s more than seven years old. Use the credit bureaus' dispute process to challenge the account. (Your credit reports provide information on how to dispute inaccuracies online or through the mail.)
If the creditor persists in reporting bogus information, your next step is to contact the creditor in writing and ask them to correct the problem (include copies of any proof you have, such as a receipt for a paid bill). If the creditor doesn’t act, you can file a complaint with the Consumer Financial Protection Bureau and consider hiring a consumer law attorney to help you. (You can get referrals from the National Association of Consumer Advocates.) You definitely should hire an attorney if you get a notice that a creditor is suing you over a debt.
If you’re getting collection calls about a debt that isn’t yours, tell the collector to stop calling and follow up with a letter reiterating your request.
If the debt is or may be yours, move on to the next step.
Collection agencies are required to send you a letter within five days of first contacting you that includes the amount of the debt and contact information for the agency. You then have 30 days to send a written request asking for verification of the name and address of the original creditor (which can help you determine whether the debt is valid) or to dispute the validity of the debt.
Collectors must stop collection efforts until they double-check this information and report back to you. Sometimes a request for validation is enough to get them to go away. If not, you’ll at least have more information to decide how to proceed. Be careful, though, about requesting validation if you know the debt is yours and it’s within the statute of limitations. Drawing attention to the debt could entice the collectors to file a lawsuit.
Consider Settling the Debt
If the debt is yours and you have the cash, consider making a settlement offer. Collection agencies often buy bad debts for a fraction of what you originally owed. The older the debt, the less they typically pay. If you can offer a lump sum payment, you may be able to settle the debt for 50 percent or less of what the collector says you owe. (Some settlement experts recommending starting the negotiations by offering 10 percent, or even less if the debt is outside your state’s statute of limitations.)
In exchange for payment, you should get the collector’s promise, in advance and in writing, that it won’t sell any unpaid debt to another collector. You also can request the collector remove the account from your credit reports (although they may balk).
Finally, make sure to set aside some money to pay the tax bill on any forgiven debt, because it’s typically considered income to you. You can find more information about debt settlement at Debt Collection Answers, a site run by consumer advocate and debt expert Gerri Detweiler.
Liz Weston is an award-winning journalist and author of several money books, including the best-selling “Your Credit Score.” She writes about personal finance at her site AskLizWeston. You can like her on Facebook and follow her on Twitter.