Ask John: Collections... How to avoid them and how to deal with them if you can't

Of the hundreds of AskJohn emails I receive (and answer) every month a significant percentage are asking about collections. As such, I am dedicating my AskJohn article this month to the subject in hopes that it will help you avoid collections or deal with them more effectively if you’ve got them.

First things first…what is a collection account?

Collection is an action taken by a lender or service provider in an effort to retrieve delinquent debts they are owed by their customers. Some lenders have their own internal collection departments but almost all of them enlist the help of an outside company commonly referred to as a collection agency. The job of a collection agency is, you guessed it, to collect unpaid money.

You probably already know that collections can have a serious negative impact on your credit reports and credit scores. They will never, ever help your credit scores. You want to avoid collections for that reason primarily, but there are many reasons to avoid collections.

Collection agencies get your accounts one of two ways. They either buy your bad debt from a lender for much less than you owed, or the lender consigns the account to the collection agency and agrees to pay them a sizeable percentage of whatever they are able to collect. Once the collection agency has your account they give a financial incentive to their agents and reward them if they are able to convince or coerce you into paying some or all of what you owe. They can be very nasty.

In fact, I personally just got a call from a collection agency asking me if I knew that my next door neighbor was behind on one of his loans. Now why would they call me to tell me that? Could it be to embarrass my neighbor?

Here’s the basic rule of collections: they are easy to avoid…and next to impossible to get removed. It is a good idea to avoid collection at all costs. Here are some ways that you can go about accomplishing this…

1. Pay your bills on time. It’s the most common sense answer to “how can I avoid collections?”
2. If you owe money to a service provider (doctor or a utility company) and for some reason you feel that you’ve been treated unfairly by them, don’t think that withholding payment is a method to get even. They will eventually hand over the account to a collector and your credit will be negatively impacted for up to seven years. Communicate with them and try and work something out that prevents them from turning the account to a collector.
3. Don’t allow a disputed charge to turn into a collection. I can’t tell you how many times I’ve gotten emails from someone who challenged charges from a cell phone company or their power company and fought for so long that the service provider had no choice but to hand it over to a collection agent. And when I ask them how much the disputed charge was for I get answers like “$74” or “$112.”  Trust me, it’s not worth the fight. Choose to lose that battle. Pay what they say you owe and try and recover the money after the fact.   

If you do have a collection account, you’ll want to be aware of the following…

1. Once you are contacted by a collection agency you have time sensitive rights. A summary of your rights under the Fair Debt Collection Practices Act can be found online.

2. Don’t confuse the credit reporting statute of limitations with the statute of limitations to collect the debt. I get a lot of emails from consumers who confuse the two rules. They know that a collection can’t be reported to the credit bureaus for longer than seven years, so they assume that if they don’t pay for seven years that it’s all over. That’s not the case at all. Collectors can certainly attempt to collect the debt even after the credit reporting statute of limitations has expired. They can sell it to another collection agency and they can even sue you. In fact, I’ve seen an increased volume of email from consumers who were being sued for debts that had been long since removed from their credit reports.

3. Remember, the collection agencies really don’t deserve what they say you owe. I would never ever advocate that you avoid paying what you truly owe someone. But, in all fairness to you, you don’t really owe collectors exactly what they say you owe them. Follow me…if I owe an apartment complex $1,000 for damage to a unit that I moved out of and I refused to pay its very likely that they’ll turn it over to a collection agency. I don’t really owe the collection agency $1,000 but that’s what they try and collect. Why? Because they are paid a percentage of whatever they can collect so the higher the balance, the more they make.

If the collection agency purchased the debt from the apartment complex they probably did so at maybe 10% of the total. That means they paid $100 for that $1,000 debt. They still try to collect the full amount. If the collectors are successful they would make about $900. That’s a great deal for them.

Because of this system, you can try to settle your debt with a collector for much less than what they say you owe. Start at 20% of what they are asking for and work up from there. And if they want you to pay all up front rather than a payment plan, don’t go for it. They just want to get their commission sooner rather than later. Structure a deal that works for you, not for them.

4. This one is very important. Beware of the infamous “pay for removal” deals. Collectors are always offering these deals. It goes something like this…”Hey John, if you will pay off the collection this month we’ll instruct the credit bureaus to remove the account from your credit reports.” Sounds great doesn’t it? The problem is that it isn’t a valid deal.

The credit bureaus have very strict policies about collection agencies making deals to remove collections in exchange for payment or settlement. If a collection is removed just because a payment is made then how is that accurate credit reporting? Did the collection never exist? Of course it did!!  And by removing them in exchange for payment it dilutes the value of the credit report.

It’s because of that the credit bureaus will not honor those pay for removal deals. I’ve gotten so many emails from consumers who are adamant that it’s a great deal and then after they write their check the collection is updated to show paid in full but is never removed.

Oh, and please don’t think that just because you write, “by cashing this you will agree to remove this collection from my credit report” on your check that it will lead to anything. I’ve never heard of that working.

The best thing you can do is to avoid collections from the very beginning. However, if you can’t then the next best thing is to minimize the damage these accounts cause by paying it or settling it. That way the debt can’t be resold over and over again and the collector can’t sue you. Get whatever settlement deal they offer in writing, keep copies of all of your correspondence and make sure they update the account to show paid in full.

If you have any comments, questions or just want to argue about this please feel free to drop me a line at AskJohn@credit.com  

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