The Debt Collection Process

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Imagine you are walking down the street and a person that you do not know, let’s call him Kurt, comes up to you and demands that you give him $5,000, which he claims that you owe him.

You explain that you do not even know who he is let alone owe him five grand. He insists that you do owe him money because you owe Joe money (Joe is a mutual acquaintance). Kurt says that if you don’t pay him the money you owe Joe, he is going to call your future boss to make sure you don’t get hired, then he’s going to call your future landlord to make sure you can never rent another place to live, and after that, he’s going to call your auto loan provider to make sure you can never buy another car—and then he does!

You continue to insist that you don’t owe Kurt any money, that he has no right to claim that you do, and that you only owed Joe $2,000 to begin with. Your boss, your landlord, and your loan provider don’t care though. They all believe Kurt.

This is an excellent metaphor for the collection industry. It is setup to operate like this by the credit bureaus and collectors on purpose. It can be confusing and expensive for consumers to properly deal with these collectors and to get these collection accounts removed from their credit reports.

The entire collection process is heavily tilted in favor of the data furnishers, the debt collection agencies, and the credit bureaus. They control all of the information and do not readily offer it for consumers to inspect in a way that is familiar to them.

Collection agencies have every legal right to report information about you onto your credit reports. All they must do is properly acquire debt that you allegedly owe. They can either purchase this debt or it can be assigned or transferred to them. Once this third party debt collector (whom you have many times never met and do not know anything about) has acquired this debt, they are allowed to begin to place claims onto your credit reports (in the form of negative collection accounts) in order to motivate you to pay off your debt and to warn other potential creditors that you supposedly owe them money. This puts immense pressure on the consumer to pay off the collector to have the item removed from their credit reports whether it is valid or not.

The system is flawed because it places the consumer in a position to suffer a major adverse life event (such as being denied a mortgage or car loan) before they are even made aware that these claims are appearing their credit reports. Laws say that consumer must be notified prior to an account reporting onto their credit reports, however in many cases this simply does not happen. Old and outdated mailing addresses are the most common reason.

Because debt collectors are not required to keep detailed records about the debt they are collecting, many times they simply purchase the debt wholesale with thousands of other accounts, and let an automated system place new entries onto all of those consumers’ credit reports. Then they just wait for the system to naturally apply enough pressure for the consumers to call them (by ruining their credit), at which point they are in a great position to collect.

The problem with the system is that thousands of consumers get caught in a cycle where inaccurate information pops up on their credit reports due to these automated systems, and then winds up costing them thousands of dollars at no fault of their own.

The good news is that there are laws in place that clearly establish what must happen when collectors want to report the debt they are trying to collect onto a consumer’s credit report. These laws provide very robust protection for consumers, and this book will give you some great weapons to use to force collectors to honor those laws and remove inaccurate information from your credit report.

Collectors generally are not breaking any laws. The system provides them with great latitude to conduct their business. What they are guilty of is not wanting to pay for the extra payroll cost of doing tasks that make their company no money, such as deleting inaccurate items from consumer’s credit reports versus collecting debt. It’s just a simple expense decision for them – removing inaccurate information costs their company money – collecting new accounts (and letting the inaccurate data just sit) makes them money.

Because collectors must adhere to established consumer protection laws in order to report debt onto your credit reports, many are not able to comply. Even so, it is very common for collectors to continue to report negative information about you to your credit reports even though they are not allowed to do so because they do not possess the legally required evidence, known as debt validation.

Making On-Time Payments to Debt Collectors Can Damage Your Score

Most of the time you will hear that making on-time payments is the best way to improve your credit score and profile. That is true most of the time, but not with collectors. The problem with paying on time to collection accounts is that they are a different type of account. Even if you paid on time for the next five years, you are still paying a COLLECTION ACCOUNT and will continue to have this COLLECTION ACCOUNT on your credit report until seven years AFTER you pay it off (remember the negative items stay on your report for seven years after the last payment).

It is a far better option to either prove that the account is being reported inaccurately so that it will be removed, or to negotiate an amazing payment plan to have it completely and permanently removed from your credit profile. The bottom line is that the longer you continue to pay a collector, the longer you will have a collection account on your credit report, and your score will continue to suffer.

You want collection accounts completely removed from your credit reports. If a collector tells you that you should just make regular payments to them in order to increase your credit score, take it with a grain of salt. The truth is, regular on-time payments to a collection account will give you a better score than not making them at all, but it is not a good strategy long-term and you may be able to make a major improvement to your situation by reading Chapter 9 on easy debt negotiation.

While making regular payment to a collection account may provide a slight increase to your score, removing it altogether is the only real way to make a significant improvement to your credit profile.

Chapter 3 Key Points

  • Collectors can legally report information onto your credit reports; however, they must follow very strict consumer protection laws to do so.
  • Collectors are required to provide you proof that they have the right to report a debt to your credit report, known as debt validation.
  • Once you request it, collectors have an unlimited time to provide debt validation, however they are PROHIBITED from reporting the collection account onto your credit report until they have provided it.
  • If collectors do not respond with proper debt validation in accordance with consumer protection laws, they are required to stop reporting the information to the credit bureaus and onto your credit reports.
  • Making regular payments on a collections account may hurt instead of help your credit rating.