How Does Settled Debt Affect Your Credit Scores
Once youve settled your debt with the original creditor, your credit scores will likely take a hit. This happens because the debt will be listed as settled. Its still better than being defaulted or charged off, but its something that future lenders can see. And it could raise a red flag when considering your credit application.
Use your credit report listing as part of the negotiation process to avoid this scenario, especially if youre offering a large one-time payment.
As part of your agreement to pay, you can request that the creditor report the debt to the credit bureaus as Paid As Agreed on your credit report. Even if you dont successfully get it updated, its worth a shot. It can even be used as further leverage during the negotiation process.
How To Deal With Zombie Debt Collectors
The best way to fight off zombie debt collectors is to formally request that they validate the debt by sending a Debt Validation Letter. Under the FDCPA, debt collectors must validate a debt with proper documentation and contractual evidence in order to collect on it.
Do not let the collection agency walk over you with threats of a lawsuit. Make them prove you are liable for the debt. Sure, you may owe them money, but what is the amount they claim? Do they have the correct account information? Once contacted by a debt collector, respond with a Debt Validation Letter within 30 days. If the collector lacks sufficient evidence to validate the debt, they will legally have to cease collection efforts.
Check out this video to learn more about how a Debt Validation Letter can help you battle zombie debt collectors:
You can also try sending a cease and desist letter to the debt collection agency if they bother you about a zombie debt that isn’t yours. If they persist, you can lodge a complaint with the FTC or attorney general’s office. If they file a lawsuit against you, don’t get frightened. You must respond to debt collection lawsuits fast with SoloSuit.
It’s also time to freeze your credit, close any accounts created in your name, set up a fraud alert, and report the incident to the FTC if you believe you may be the victim of identity theft.
Request A Goodwill Deletion
If you have an otherwise good credit history with an isolated negative item, you might consider writing a goodwill letter to the original creditor. It is a request to remove the negative items from your credit report out of goodwill. Creditors want to help you, especially if youre a long-term client with a good past relationship.
Youll want to reference the length of time youve had an account with a creditor and mention that, moving forward, you intend to keep your account in good standing. Discuss how your credit history is promising and how your late payment was a one-time error.
Then, clearly state your request for a line item revision on your credit reports as a gesture of goodwill.
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Be Aware Of Debt Collection Scams
Debt collection scams are real, and scammers may use anxieties about debt in order to pressure you into paying. Watch out for supposed debt collectors withholding information, calling you late at night, threatening jail time or asking you to pay with a prepaid card.
Confirming both your debt and the collection agencys right to your payments goes a long way in protecting you against potential fraud. Never give anyone access to your bank account. Instead, pay with certified checks and keep detailed records of your payments along with your original agreement.
If you think a debt collector has broken the law, report them to the CFPB. You can also sue them in federal court within one year of when they broke the law.
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How Do You Know If Your Debt Has Been Sent To A Debt Collection Agency
The original creditor handles most debts until they hit about 150 days of delinquency. So if youre only two or three months behind on your monthly payments, chances are, the original creditor still holds your debt.
You should receive a written notice in the mail warning you that your account is about to go into collections. So, keep an eye out for any correspondence from your creditor.
Never throw any paperwork away, even if youre dreading what may be inside. If youre uncertain whether youve received a letter or not, call the creditor. Even if youre at odds with them, they should be a trustworthy source of information regarding your accounts status.
How Does Debt In Collections Affect Your Credit
When a debt goes to collections, your credit score will go down, but there are ways to improve your credit if it does. The collection account will stay on your credit report for up to seven years even if you quickly pay it back. Lenders will be able to look at your credit report and see that your debt went to collections. The good news is that if it was only one or two debts and you paid them off and otherwise have a clean record, lenders may still extend credit to you.
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Fully Comprehend The Extent Of The Debt
Although it might be tempting to comply with a debt collectors request for money right away, take some time to figure out whats going on. Get the correct information regarding:
If you know how to get a credit report, then you can also get information about this debt from there. Make sure everything matches up both on your credit report, as reported by all three along with the information from the debt collector. Now, you can get free credit reports weekly to stay on top of all the updates that hit your credit report.
Debt Collection Agencies Buy Your Debt From Lenders
Debt seems like a fact of life for many Americans. Four out of five Americans owe some debt. Collectively, Americans owe $1.4 trillion to banks, , and other lenders.
There are usually two parties in debt collection cases. First, there’s the party who allegedly owes money, called the debtor. Then, there’s the party to whom the money is allegedly owed, called the creditor.
Often, a creditor finds they can’t collect a debt from a debtor. Interest keeps piling up on the debtors loan, and there’s no money coming in to pay it. A creditor now has two options:
A debt collection agency is a company that buys unpaid debt from a creditor. On average, debt collection agencies buy these debts for just 4% of the original debt amount . Then, they attempt to track down a debtor and force them to pay it all back.
Lets consider an example.
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The Short Answer: Pay The Debt Collector Or The Original Creditor
Usually, its the original creditor that will offer more favorable terms for repayment. One reason the original creditors tend to give better terms is that they will end up recouping more of their money if they negotiate with you instead of selling the debt to a debt collector.
You may be asking, Why would they sell the debt to a debt collector in the first place? The original creditor may not have the resources to chase after these debts. Theyd rather sell the debt to a debt collector and receive at least a small percentage of the original amount instead of getting nothing.
The Debt Is Past The Statute Of Limitations
Each state has a statute of limitations on debts. If you find out that the debt is yours, you will then need to see if it has expired. If the debt has expired, then you are not obligated to pay the debt any longer. The debt collector is no longer legally allowed to seek payment of the debt. If you try making payment on an expired debt, it could reinstate the debt and make it much worse in the long run.
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Benefits Of Paying The Old Debt
You may not want to pay off old debt because you’d rather spend the money on something else. However, there are benefits to biting the bullet and paying what you owe.
- You have no unpaid collections influencing your credit score. Paying off a collection account gives you points in the payment history portion of your credit score.
- Your debt-to-income ratio decreases. When you eliminate a debt, you decrease your debt load and your debt-to-income ratio. It is good for your overall financial health.
- Lenders and creditors will be more willing to give you new credit when you have no outstanding obligations. Many lenders, especially mortgage lenders, require you to take care of all unpaid debts before theyll offer a loan to you.
How Do I Pay Off Old Debt In Collections
How to pay off debt in collections
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You Dont Owe Any Debt
One of the first things you should do if a debt collector contacts you is to verify that you actually owe a debt. If the debt collector can’t show valid proof that you owe a debt or if the debt was paid off, then you have no legal obligation to pay the debt.
You must, however, send a written notice to the debt collector that the debt is not yours and you do not wish to be contacted any further.
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How Does Collection Affect My Credit Score
Having debt in collections definitely negatively impacts your credit score. Paying off the debt will likely improve your score with credit bureaus that use FICO 9 or Vantage Score 3.0 or 4.0the newest versions of credit scoring.
Debt in collections is considered under payment history, which is the biggest factor in the most common credit score, FICO. Payment history drives 35 percent of your score.
Some lenders have special policies that prohibit them from lending to people with unpaid debts in collection.
Should You Pay The Debt Collector Or The Original Creditor
As we have mentioned at the beginning of the article, communicating with original creditors is simpler than striking a deal with debt collection agencies.
If your debt was sent recently to a collector, you still have a chance to communicate directly with the original creditor. Especially if less than 6 months have passed. You can call the creditors customer service and ask for some agreement, such as a payment plan. Pro tip: being friendly, calm, and equipped with fair points always helps.
Overall, your best course of action is to check your credit reports regularly and act quickly.
But what happens if the creditor has completely signed off the rights to your debt and there is seemingly no other way than to pay the debt collector? Keep in mind that paying them may further damage your credit score for a few long years. On the other hand, if you avoid paying the debt for seven years, it will get erased from your reports. The same goes for events like bankruptcies.
You may consider settling your debt with the collectors. While this may seem a relatively simple way to solve the problem, you should know that collections agencies have a history of taking advantage of under-informed citizens. They often try to settle debts for a bigger amount, and they may not notify the credit bureaus that the debt has been settled.
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There Are Different Types Of Zombie Debt
Like we said, youd be surprised how often debt collectors successfully collect on zombie debt. This is because there are different kinds of zombie debt, and know this can help you protect yourself when collectors come crawling your way.
Heres a list of the different types of zombie debt you should know about:
Dealing With Debt Collectors
If you must deal with a debt collector, you should know your rights under the Fair Debt Collection Practices Act . Then, if you have any complaints about how a debt collector is handling the debt, you can contact the Consumer Financial Protection Bureau.
Also, check out our in-depth article on how to settle your debts with a debt collector.
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Send A Pay For Delete Letter
Collection agencies and lenders may remove collection accounts if you negotiate with them. One tool is the pay for delete letter, which is a written request to have negative marks removed in exchange for a partial or full payment.
A collection agency is contracted to collect payment on a debt for the original creditor or lender. They receive a percentage of the amount collected. In order for it to be an incentive, a pay for delete letter may need to offer an amount greater than the collection agency paid for your debt.
Your pay for delete letter should include relevant information such as:
- Payment amounts
- Negotiation terms
If the creditor agrees, always make sure to receive the creditors agreement in writing before making any payment. If you want to learn more or are looking for a letter template to use, read about how to use a pay for delete letter as a negotiation tool.
Not all creditors will accept pay for delete letters. Most banks and mainstream creditors are not open to negotiation, but small utility bills that go to collections might be more receptive to this strategy.
How To Work With The Original Creditor Instead Of A Debt Collector
Creditors will generally try to remind you of the debt owed for about four weeks. After that, they may decide to sell your debt to a third-party debt collector. Now, the question is if you should pay the debt collector or the original creditor. Once the original creditor starts paying the debt collection agency for its services, you likely won’t be able to negotiate your debt with them anymore. That’s why it’s important to reach out to your creditor within four weeks of its initial correspondence to you.
Some creditors might still be willing to work out a repayment strategy a few months afterward. However, this is largely dependent on how much the creditor has already paid to the debt collection company.
To find out if the creditor is willing to negotiate with you instead, follow these steps:
This solution won’t always work due to factors out of your control. If the creditor has already sold the rights to your debt, you can only legally negotiate it with the debt collection company.
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How Collection Agencies Buy Your Debt From Lenders
The collection business is a lucrative one. Americans together owe $1.4 trillion to agencies, banks, and other financial institutions and lenders.
If youre one of those Americans, then youre the debtor in this situation since youre the party that owes money. The other party is the creditor to whom you owe money.
But a third player frequently enters the field. If the lender cant collect the debt from you and interest piles up, they need to choose between two options. Because if they dont, theyll be losing money. Here are those two options:
The lender collects the debt themselves: Lenders rarely go down this route since it requires effort and time.
The lender sells the debt to a debt collector: Lenders can employ the help of a collection agency that can deal with the issue instead of them. That way, the lender isnt collecting the debt, but they still profit and offset some of the losses.
These collection agencies are a popular business in the US. They buy unpaid debt from creditors and start tracking down the debtor. As you can imagine, this often leads to debtors being contacted relentlessly by these agencies. Emotion-based tactics are used to press people to the point of frustration. Its not a pleasant experience for the debtor to say the least.