The Debt Collection Process

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 consumers onto their credit reports. All they must do is properly acquire debt that a consumer allegedly owes. They can either purchase this debt or it can be assigned or transferred to them. Once this third party debt collector (whom most consumers have never met and do not know anything about) has acquired this debt, they are allowed to begin to place claims onto a consumer’s credit reports (in the form of negative collection accounts) in order to motivate them to pay off the debt and to warn other potential creditors that the consumer supposedly owes 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 consumers 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 course will provide several options to use to force collectors to honor those laws and remove inaccurate information from you or your client’s credit reports.

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 a consumer’s credit reports, many are not able to comply. Even so, it is very common for collectors to continue to report negative information about consumers onto their credit reports even though they are not allowed to do so because they do not possess the legally required evidence, known as debt validation or verification. 

Making On-Time Payments To Collectors Could Lower a Consumer’s Credit Scores

Most of the time we are told that making on-time payments is the best way for consumers to improve their credit scores 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 a consumer were to make regular,on-time payments for five years, they are still paying a COLLECTION ACCOUNT that is impossible to ever not be negative, because it is a collection account. 

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 the consumer’s credit profile. The bottom line is that the longer a consumer continues to pay a collector, the longer they will have a collection account on their credit report, and the longer their score will continue to suffer.

Instead of regular payments, consumers should instead focus on having the accounts in question completely removed from their credit reports. If a collector tells a consumer that they should just make regular payments to them in order to increase their credit score, it should be taken with a grain of salt. The truth is, regular on-time payments to a collection account provides consumers with a better score than not making them at all, but it is not a good strategy long-term and consumers might be much better off negotiating a small, one-time payoff amount in exchange for credit for paying the account in full.

While making regular payments 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.

Advanced Collector Tactics

Claiming The Consumer Owes More Than They Do

If an original creditor is claiming that a consumer owes them $5,000, a collector could claim that the consumer owes them more —the original amount plus interest. It is totally legal for them to do this in many states, and it can make it appear as if a consumer owes substantially more money than they actually do if the collector artificially inflated or miscalculated this amount.

When a collection agency attempts to collect an account, they have to legally be able to back it up with documentation, known as debt validation, when it is requested by a consumer through the dispute process. After they send the consumer this evidence (validation) is when the consumer will need to understand how the information they have been provided fits into their credit repair process. Inconsistent information is not allowed to be reported onto consumer credit files.

Sending Confusing Letters

Consumers should be careful when collectors send out correspondence like the following example. They sent this in response to a request to them for debt validation. Not only did they not provide the validation as required, but they also sent a form with a block asking for the last four digits of the “responsible party’s” social security number (consumers are advised to never complete a form from a collector that asks for information like this one).

Because the consumer had sent their entire social security number with her earlier request for debt validation, to which this form was a response, she knew that the collector was playing games and trying to have her enter information into the “responsible party’s” box. This point was brought up by the consumer in her follow up letter to the form below.

After the consumer received this letter, it was a simple process to upload it along with the letters she had received from the bureaus in response to her dispute letters, and the actual letters that she had composed and mailed, to the CFPB to file an official complaint for the account continuing to be reported without proper debt validation having been provided. Less than 30 days later the CFPB instructed the collector to permanently remove this account from her credit reports.

In the image below, the debt collector has sent a response to a validation request. In their response, they ask for the last four digits of the “responsible party’s” social security number. If this form were to be filled out and returned, the debt collector could then use it to suggest that whoever the “responsible party” is has the same last four digits, or claim that this was an acknowledgement of the debt in order to restart the statute of limitations for collect-ability. 

Consumer’s who receive forms like this that seem to suggest self-incrimination are advised to keep and make a copy, but do not respond. Afterwards it can be used as additional evidence that this account is not being reported in accordance with current consumer law. The law does not state that consumers need to provide the last four digits of their social security number, or any information, to a debt collector for any reason. If they don’t validate the debt, then it must be removed from the consumer’s credit reports until they do so.