Debt collection in a nutshell

Types of Collection accounts:

Secured items include mortgages and car notes or anything that has collateral. The collection process in these matters usually ends in foreclosure or repossession of the collateral. Most people think that is the end of the story but then they find out there is a remaining balance resulting from the difference between the loan amount and what they sold your collateral for. Bad checks can be considered secured because they hold your check and may cause legal trouble if not resolved.

Unsecured debt is a lot less dangerous in that it has no collateral. Unsecured debt includes credit cards, medical bills, utility bills, and other miscellaneous items. Medical bills are the least dangerous collection items. They are usually for emergency room visits and co-pays for insurance payments. Not many medical professionals will sue someone who gets injured or ill and cannot afford to pay it. A lot of hospitals have charity assistance systems in place and can forgive the bill under certain circumstances.

Credit Cards are different. You signed a contract and agreed to pay it. Collections on credit cards are more aggressive due to this fact and the reason that there is no collateral so the clock is ticking for the creditor to persuade you to pay. Credit card contracts have all kind of traps in them for the defaulting consumer. Interest rates can be hiked up on default; interest may be applied for years after the account is closed. Late fees, over the limit fees and other charges accumulate on your account until your balance exceeds your original balance by hundreds or thousands of dollars. This is the wiggle room for settlement negotiation.

The flow:

"In-House" collection is the first step in the process. A friendly reminder via telephone or mail. The creditor wants you to get your account current. They may have reported you 30 days late already. They still want your business. This is the time to resolve things with minimal problems down the road. You may even get the late reporting on your credit report if you make nice with them. They are not as aggressive as the next round of people you will be dealing with, but keep in mind that these folks are still collectors and driven by production quotas.

Once your account is past the point of no return the creditor has no more credibility. Charge-off is the next step in the process. When a creditor charges off an item, they take the economic loss as a tax write off. Some people say "Well they wrote it off, I don’t have to pay." Wrong. You agreed to pay it; just because they are taking a loss in profit does not mean you don't owe the money.

First Placement usually occurs within thirty days of the account charging off. If the creditor uses a third party collection agency, this is where the annoying part begins. "Fresh paper" is every bill collector's bread and butter. If it is going to be paid, statistically this is where it will occur most of the time. Sometimes a letter campaign will be sent by the agency to try and prevent paying commission on payments that are on the way already or were just forgotten about. Then the phone calls start. The more skilled collectors get first crack at these accounts. They are aggressive and about as cunning as they come. After that the process graduates down through other levels of collectors and automated phone dialers depending on the balance, account type and other factors. At some point the collection agency loses credibility and the account goes back to the original creditor.

Secondary Placements occur after that and the process starts all over again. This is where disputed and settled accounts rear their ugly heads again. Incorrectly noted account files end up back in with thousands of other account records and are transferred with a blank history of what occurred previously. Finally the account, if unpaid, becomes what is known as tertiary paper. It has been through numerous agencies and may be nearing the statute of limitations deadline. Sometimes an aggressive last ditch effort to settle the account is initiated.

The collector:

The typical bill collector is a Type A Personality, usually with a telemarketing background. They are driven by the commission structure in place in addition to their hourly rate. They are frustrated and have been cursed at and threatened hundreds of times. They make anywhere from one hundred to two hundred calls a day.

Training for collectors by their employers can include communication tactics and psychology. They are trained not to ask yes or no questions, when to pause, what to say, etc. Although some collectors have limited skills, some can be very observant and are looking to catch you in a lie. Technique varies from person to person. They can be nice and they can be rude. Tactics include "walking the grey line" between what they legally can and cannot do, appealing to you sense of pride and honor, and blatant but disguised harassment and other psychological tricks to get you to pay.

The FDCPA or Fair Debt Collections Practice Act is the law regarding collection of debt. Violations of this law can result in $1000 fines for each violation to the collector, the collection agency and the original creditor. Once you let them know you know about it, they usually tread lightly from hen on in when communicating to you.

The Best Strategy:
  • Ignore It:

    If a debt is unsecured and you cannot pay it, it will stop affecting your credit report after 24 months of inactivity. That is not to say the original creditor or any subsequent company will not make some activity for you by selling, transferring or some other action. Keep in mind that a payment on a 23 month old inactive collection resets the statute of limitations and starts the 24 month clock on damaging your credit score all over again. As an example, paying an old medical bill off may actually lower your score by making a delinquent account more recent as far as account activity. Keep in mind that there is a chance that even an unsecured debt could result in a lawsuit, but have you ever met anyone sued for a credit card?

  • Dispute It:

    Although not a sure fire way out of a bill, in some cases you can dispute a collection with success and have it disappear. If you have documentation and a lot of persistence you can get the collection wiped out and removed from your credit. Be ready for it when it returns however, as the inconsistencies with the flow of collection accounts usually means someone else is going to call you some day and try to get you to pay it. If you don't have documentation that it was resolved the process may need to be started all over again. Always get all collection negotiations or resolutions in writing.

  • File Bankruptcy:

    The laws regarding personal bankruptcy have changed recently to regulate consumers seeking bankruptcy protection. Although bankruptcy will not destroy your credit history, it will complicate it immensely and limit your options for 7 years. An immediate negative impact on your credit report can only be overcome by building new credit histories. This takes time and in some cases money. You also will wind up paying for it in interest rates in most cases with the stigmatism of the bankruptcy on your credit report.

  • Pay It:

    In some cases, you are going to find that the best resolution is to pay the collection off. Making partial payments on your collection accounts is the least most effective way to resolve the problem, but it is a start. Keep in mind that a collection account is not going to be updated on your credit report until it is paid in full. For instance, you have a $500 collection account and you pay $50 a month for 9 months and then stop paying. Your credit report will most likely indicate the original balance and your account may be accruing interest as well, depending on the fine print in the contract for credit.

    Settling the account with a lump sum payment at a discount is by far the most effective way to fix your credit, rid yourself of the collection item and save some money. Although a lot of the balance is interest and late fees, you did agree to pay them when you applied for the credit so stop pretending you do not owe them. Depending on where the account is in the flow of collections, there are different percentages that the creditor and collection agencies will accept to clear the balance of your collection account.

    As a rule of thumb, the older the debt is, the better the deal. Some creditors will accept pennies on the dollar but the average settlement is over 50%. Sometimes this can be paid in 2 or more payments but be cautious that you do not miss one payment by even one day or the arrangement is void. Collectors have a budget or quota to hit; they have a deadline to hit that goal. Money now is their main concern. If you promise a payment by the 30th and do not pay it, you will not be greeted kindly during the next conversation. You are better off telling the truth about when and how you will pay and get off the phone till you have the money. Remember that the collector is paid on how much they collect and will try everything to maximize their effort.

    If you enter the situation as a business negotiation and not a personal conflict you remain calm, cool and collected. You ultimately hold the upper hand because you have what they want. If you can build a report with them and be up front, they will be more inclined to "get that manager" on the phone and try and "help you out". All initial offers by collectors are only the beginning. Rarely will they come right out and tell you they can take fifty cents on the dollar. It's like buying a car. If you want to pay 50% offer 35%, they will counter with 75% and go from there. Again, make sure you get everything in writing.