DIY Credit Repair Course Module 5: Understanding Debt Collector Validation Letters

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The Dangers of Debt Validation For Valid Debts


The module following this one will provide a debt validation letter than can be sent to a collector, however credit repair practitioners need to first determine if the account that they are disputing would benefit considering the additional risk that asking for collector validation can create. This section will discuss the dangers of the debt validation letter technique, and what to look for when evaluating whether or not this technique is appropriate for a client’s situation. 

Debt validation letters are used exclusively for requesting validation of a debt from a collector. According to statistics, most debt collectors only take the time to actually validate 50% of the debt validation requests they receive. This means that 50% of the time, simply sending a debt validation letter to a debt collector will result in the item being removed from your client’s credit reports right?

Not exactly.

What Happens When I Send A Debt Validation Letter? 

Like many credit repair techniques, formally requesting that the debt collector validate the debt they are reporting is similar to kicking the beehive. The reason is, debt collectors only receive validation request letters from a very small percentage of the accounts they are trying to collect on, and most of those are high value accounts that they are aggressively trying to collect.

When you send a debt validation letter on behalf of your client, you are putting your client’s account on the radar of the debt collection agency. It costs them money to validate a debt, so they generally only do it for accounts that are considered “collectible”. If they receive a debt validation letter referencing an account that is fairly new with a high balance, there is a good chance that the collector will validate the debt and then sue your client. After all, they have already taken the time to validate the debt and can send a process server to the address the dispute was sent from. 

There is no time limit to provide the validation.

Sending a debt validation letter to a collector also gives the debt collector another huge advantage. The formal request for validation of the debt allows the collector an unlimited amount of time to process that request. What that means is that the debt collector can validate debt whenever they choose, even if that is several years from now.

The good news is that they cannot continue collection activities, including reporting of negative information, until they validate the debt.

This means that if your client has low balance accounts that are older than about 4 years old in most cases, if you request validation, it is likely that the collector will not comply. If they do not stop reporting the negative information onto your client’s credit reports after they receive the debt validation letter, and they do not provide validation, then they are not in compliance with consumer protection standards. Even though they have an unlimited time to respond to the request for validation, they cannot continue to report information onto a consumer’s credit file until they do so. In this case, it would be very likely that a complaint filed against either the collector or the credit bureaus would be successful in forcing compliance and the removal of this negative information. 

When should a debt validation letter be sent?

Debt validation letters should be sent to collectors when the age of disputed accounts or the dates of last payment are outside the window of your client’s statute of limitations for the collector to sue to collect the debt. In most states this statue of limitations is 4 years. 

For example, if your client lives in Texas your state limits the amount of time that they can be sued for bad debt to 4 years. If the account in dispute is a 5 year old account being reported by a debt collector, then you can safely send them a debt validation letter on behalf of your client. This is because the collector’s main intimidation tool and revenue generator, the lawsuit, has been taken off of the table. 

Asking a collector to validate the debt at this point is asking them to spend money which they have a very low chance to collect, and therefore probably won’t. If they don’t take the time to validate the debt in this case, then the negative information must be completely removed from the consumer’s credit reports. Remember that the collector and the bureaus won’t do this voluntarily or automatically. Even though you may create a “win” for your client by requesting validation from a collector and then the collector failing to respond, the negative information will not automatically fall off of your client’s credit report in most cases. The final step of managing their dispute process, as is the case with many, will be working with them to file a complaint through the CFPB with all of the supporting documentation.

The dangers of writing debt validation letters are mostly focused on accounts that are deemed “valid” or “collectible”. This generally means younger accounts with higher balances. If your client’s account is older or they deem your client to be “noncollectable”, they likely will not process any received validation request as required and the negative account must be removed from your client’s credit reports. It also helps if previous collectors have tried and failed to collect the same debt. 

Collectors will rate a consumer’s collect-ability higher if they are able to verify certain information, including place of employment and whether or not any open checking or savings accounts exist. Be wary of any additional information you give to a debt collector and limit all of your communication with them to in writing only. 

In many cases the collector is simply unable to validate the account as required by law because the information is inaccurate, meaning it must be removed from the consumer’s credit report.

Sending A Debt Validation Letter Will Create Extra Scrutiny

According to the FTC report “Life of a Debt: Data Integrity in Debt Collection” just 3.2% of accounts that are processed by junk debt collectors are disputed. That means that if a consumer chooses to file a validation request, then they’re account will be among the 3.2% that are getting the most looks as opposed to the 96.8% that aren’t. If they’re account is deemed worthy of investing in the effort required to collect it, meaning it is a younger account that is large enough to make sense for them as company to sue to collect it, then filing a validation request will likely increase the chances that you or your client are sued by the debt collector rather than fix existing credit errors.

What’s the Bottom Line?

With credit repair there are several ways to get tripped up, and sending letters at the wrong time or to the wrong people is one of them. If dealing with debt collectors and the debt is older than you or your client’s statue of limitations for the collector to file a lawsuit, then there is a tremendous amount of leverage available to negotiate with, and a dispute validation letter will likely be effective. Also, a payment negotiation at this time can completely pay off the debt and can be extremely cost effective. If your client has the means to do so, simply offering a negotiated amount to completely settle the amount in question for a small percentage of what the collector is asking is often the fastest and most practical advice. 


An FTC Round-table About Debt Collection


This round-table examines the flow of consumer data throughout the debt collection process.

The FTC has produced several video recordings of their debt collection workshop several years ago. Included in the workshop were representatives from the FTC, CFPB, state governments, consumer attorneys, debt collectors and original creditors. These videos contain important information relating the state of debt collection as it relates to the reporting of credit information.

This videos located at the FTC website below are provided as reference and students are highly encouraged to watch some or all, however it is not required. 

https://www.ftc.gov/news-events/events-calendar/2013/06/life-debt-data-integrity-debt-collection

FTC Publication: The Structure And Practices Of The Debt Buying Industry


Are Debt Collectors Ever Beneficial?


Although it may seem hard to believe, having many debt collectors attempting to collect at the same time, or having multiple negative entries on you or your client’s credit reports, can be a great tool for negotiating an effective solution to credit problems.

If there are many negative accounts on your client’s credit reports, that is strong evidence that your client could send to the collector to let them know that they have many financial obligations. This limits the amount of money your client would be able to pay to any single company, and makes it apparent to the collector that continued collection efforts against you, even if technically successful, likely won’t be worth the company’s time if there isn’t enough money to go around. 

In your client’s letter, let the collector know that your client has many competing financial obligations and that although your client disputes the accuracy of the account the collector is reporting, they are willing to provide the collector with a small amount of revenue via a negotiated payoff amount in exchange for a full and complete deletion of this record from their credit reports. 

If there are several collectors trying to collect at once, you can play them off of each other by letting them each know that even if your client had the additional funds to pay, it would have to be divided up. This type of tactic works extremely well if you let collectors know that your client has serious collection activities, such as the IRS, trying to collect. They know they can’t compete with the IRS and will take almost any settlement if you let them know that as soon as your client has additional funds it will all be going to the IRS. Tactics like this work well to position your clients for negotiating an excellent payoff option or other very favorable terms. 

Many consumers have had success by turning themselves into “hard targets” for the debt collector by disputing information while simultaneously letting the collector know they are in financial distress, and will have to pay off several parties once the distress ends. This will motivate the collector to cut their loses and accept a much lower offer than they might otherwise. 


Module 5 References


1. Video: Life of a Debt: Data Integrity in Debt Collection – Part 2; https://www.ftc.gov/news-events/audio-video/video/life-debt-data-integrity-debt-collection-part-2 

2. PDF: Source: United States Federal Trade Commission; The Structure and Practices of the Debt Buying Industry

3. “State-by-State List of Statute of Limitations on Debt”; https://www.thebalance.com/state-by-state-list-of-statute-of-limitations-on-debt-960881

4. “Life of a Debt: Data Integrity in Debt Collection”; https://www.ftc.gov/news-events/events-calendar/2013/06/life-debt-data-integrity-debt-collection