Rarely do consumers rack up massive debt intending to default on their obligations. From time to time, however, financial hardships arise that make it all but impossible to make even the minimum payment. Missing just one payment often has a cascading effect, leading to missing even more and more payments.
Eventually, after lots of phone calls, letters and threats, your creditors will eventually cease their collection efforts and “write off” the balance by selling your obligations to a collection agency, but that can be a long arduous process for you and your family. If your credit account has already gone to collections or has been long since past due, what should you do, if anything?
The original creditor on your account will typically pursue the balance you owe on a credit card for an extended period of 6-12 months, sometimes longer. After phone calls and correspondence with the account holder are unsuccessful, the creditor will consider the account for charge-off.
They will then sell the debt for pennies on the dollar to a collection agency that is tasked with unenviable task of collecting on the money owed. The collection agency gets compensated in the form of a percentage paid on the amount they collect from the debtor. Incentivizing debt collectors in this manner opens the door to some pretty unsavory debt collection tactics.
When the collection agent takes on an unsettled, unpaid debt from the original creditor, they will likely follow the same routine as the creditor for making contact – except their attempts are often much more aggressive and often times overwhelming relative to the original creditor’s tactics. Daily phone calls begin along with regular written demand for payment. The phone calls in particular will likely occur several times a day the longer the consumers fail to reply. In the event a collection agent gets a consumer on the phone, the tactics usually involve rough talk, bordering on intimidation to get the consumer to agree to payment terms.
These collection agents are experts at finding hot buttons and pain points, using guilt and repeated prodding to get their commission.
Once a credit account is in the hands of a collection agency, consumers will quickly notice the detrimental effect on their credit since collectors actively report to the credit reporting bureaus. Any account that is 30 days late or more is going to be reflected badly on a credit history. The original creditor will likely have reported the account being in a charge off status but the collection agency will then add a second negative entry on a consumer report. If a consumer pays the charged off account once it has been taken over by a collection agency, the information will still be reported as a ‘charge-off’ by the original creditor as well as ‘late’ by the collection agency. Essentially, paying off a collection agency after the debt has been charged-off can have a double-whammy effect on your credit score.
Dealing With the Fall Out
When you have a collection agency on your tail, you can pay the debt in full, settle with the creditor for a lower amount or continue to face the music (ie harassing phone calls). Before agreeing to pay the collection agent in full, you should first request that they rescind the ‘late’ payment status with the credit bureaus in writing. Not all will comply but it’s worth asking. If they agree, before making payment in full, get it in writing. If you must make payment arrangements, offer only what you can reasonably afford despite the collection agent’s best effort to scare you into paying more.
There is a statute of limitations on old consumer debt obligations set by each state according to the ”aging” of this debt. These statutes of limitation establish how long a debt can remain the legal responsibility of the debtor. After a certain period of time, according to each state’s statute, a debt can no longer legally be collected. While it may seem like a rather short timeline to wait, consumers need to remember that they also face a 7 year wait until the account is deleted entirely from a credit report. However, if at any time during this wait you choose to make a payment on an old debt, you effectively restart the timeline for the statute of limitations for legally collecing that debt.