Collection Agencies Buy Charge Off Debt

When a debt is first charged off, you may have a “quiet” period where no collection attempts are made. For many consumers, this may seem like a moment of relief – no collection calls, no demand letters, no contact of any kind.

Unfortunately, behind the scenes, your creditors are working to recoup their losses. Many times, they do this by selling your charge off to a collection agency, who then takes up the task of getting you to pay.

Collection agencies do not have any prior business relationship with you, and their only motivation is to get you to pay – by any means necessary. Many collection agencies have been found in violation of the Fair Debt Collection Practices Act (FDCPA) due to these aggressive collection policies.

What this means for you is:

• More phone calls – debt collectors often call many times a day, especially if you don’t answer the phone

• More demand letters – some of these may include mysterious “fees” in addition to the original amount you owe

• More negative entries on your credit report – the collection agency will most likely ding your report for the same debt.

• More confusion as your original debt may be bought and sold many times, making it uncertain who you should pay

As we come out of a recent recession, the amount of revolving consumer credit has plummeted. Many of these consumer accounts have been closed and are likely in charge off status:

The Collection Agency May Not Own the Charge Off

In some cases, a collection agency may pull your credit report on the belief that you owe a particular debt – whether you have the same name as another debtor, lived at a similar address, or some other factor can trigger this pull. If the collection agency bought a charge off from your original creditor, they will also most likely pull your credit.

However, in some instances the debt in question may not be yours, or the charge off information is used by a different creditor to try to get you to pay on a legitimate debt that is actually owned by another company.

This happens often in the case of very old debt which has been sold multiple times – the collection agency will still have your information in their system even though they’ve sold the debt, and whether through error or greed, they attempt to collect on a debt they no longer own.

What You Can Do to Fight Your Charge Off

• Verify that the original creditor sold the debt – sometimes, the creditor will be willing to work with you to settle through their own in-house collection team. If you can get an agreement with the original creditor, you can dispute the collection agency’s entry and have it removed from your credit file.

• Get verification of the debt from the collection agency – once you get confirmation that the original creditor did sell the debt, contact the collection agency, in writing, to get verification of the debt. Sometimes, the collection agency will not have all the information necessary to verify the debt and the listing will be removed from your credit report. Also, they cannot contact you to collect a debt until the verification process is complete.

• Get everything in writing if you have to deal with the collection agency. Remember, they only paid pennies on the dollar to purchase this charge off, so you may be able to pay less than you owe in order to remove the charge off from your account. But you have to have it in writing if you want the collection agency to honor any agreement you reach with them.

• Make certain that there is only one collection agency listed for your charge off – multiple companies claiming to service the same charge off not only hurts your credit score, but it makes it difficult to know who you should pay – this is why you must always get verification of the debt before you send any money whatsoever.

One more important point to note – make sure that the collection agency does not attempt to re-age the debt. The collection account should list the same dates for the debt as the original creditor, and is subject to the same statute of limitations on the collection of the debt.

Collection agencies that attempt to make the debt appear more recent are violating the FDCPA and you can dispute the dates to have them corrected or the entry removed entirely.

The first thing to realize is that charge offs do not free you from the financial obligation to pay a debt. Though the collection calls from the original creditor will likely stop coming, and you won’t receive notices in the mail anymore, this is only the calm before the storm.

Charge offs actually indicate that the creditor is counting your debt as a “loss” for accounting purposes – and the creditor can and often will continue to try to collect on the debt via other means. Usually, by contracting with a collection agency, or using their own in-house collections team.

Why Charge Offs Hurt Your Credit Score

When charge offs appear on your credit report, they serve as a red flag to other potential lenders – even if most of your accounts are up-to-date and paid on time, a single charged off debt can cause you to be denied for multiple types of credit.

The most notable example of this is a mortgage. To qualify for any mortgage, you will most likely have to pay off any charge offs listed on your credit report. However, you may also find that you are turned down for store cards and credit cards as well.

Once your account is in charge off status, paying the charge off will only help your credit slightly – a paid charge off is certainly better than one that is unpaid, but in terms of your credit score, the lift is usually minimal. While you can negotiate to get the charge off removed in return for full payment, these types of requests are not always honored by the creditors.

Charge Offs in Recent Years

If you have charge offs on your credit report due to financial troubles, you aren’t alone. The downturn in the economy in the past several years has triggered an explosion of charge offs that have impacted credit scores across the board. As this graph shows, the number of charge offs for credit card debt and consumer loans has spiked and remains prevalent even now:

Preventing Charge Offs

Every company has different internal policies about when a debt will be considered charged off. However, a general rule of thumb is that a debt will be listed as a charge off after 180 consecutive days of non-payment. This means that for the majority of creditors, you will be hit with charge offs around the six-month mark.

Once this happens, there are only two ways to deal with the charged off account:

1. Settle with the original creditor (or the collection agency) to get the listing removed.
2. Wait for the reporting limit to expire, and the charge-off to drop from your credit report – in roughly 7 years.

To prevent charge offs, you have several options:

1. Make your minimum payments. This is the simplest solution, if you have the funds available. You don’t need to pay off the entire amount of your debts, so long as you can meet the minimum payments necessary.
2.  Work out a payment agreement. If you just can’t afford to pay the minimums right now, you may be able to get your creditor to agree to a temporary halt in collection activity if you make a good faith effort to come to an agreement.
3.  Take action to catch up on debts that are 4 or 5 months behind. In some cases, it doesn’t have to be the full amount that you owe at that point. Making a payment in good faith may prevent your creditor from turning over the account to collections.

Charge Offs and Statute of Limitations for Debt Collection

It’s important to remember that the statute of limitations (SOL) for how long a creditor has to sue for a debt is not the same as the time that a listing can remain on your credit report. It is very common for debt to be time-barred to an actual lawsuit, but still legally reportable on your credit report – thereby damaging your credit scores.

Further complicating matters is the fact that the SOL varies from state to state, and some creditors enforce the SOL in various ways. For instance, some creditors will apply the laws of your state of your current residence to determine whether or not the debt is time-barred.

Other creditors will use the SOL of the state where you lived when you first took out the loan or credit card. Still others will use the SOL of the state where the business is located – so it’s important to know which location will be used for the SOL if you decide to “wait it out” for your charge offs.

In Part 2 of our discussion about charge offs, we’ll talk about what to do when charge offs are purchased by an outside collection agency, and how you can protect yourself from the negative impact of account re-aging and other collection company tactics.

Myth: Once a Debt is Charged-Off, I Don’t Have to Pay It

Charge-offs may seem like a positive at first, namely because the term sounds very similar to a “discharged” debt, which is one that has been cleared. Charged-off debts, despite the similar-sounding name, do not clear you of the obligation to pay the debt. Instead, it is an indication that the company does not believe you will pay the debt and therefore it has been removed from their accounts receivable. It essentially makes your debt an expense on the record books of the company, but that does not relieve you of responsibility. Charged-off debt classifies you as a ‘high-risk’ to many credit issuing companies, and can severely impact your ability to get future credit.

One Caveat: if the debt is past the time allowed by your state to collect, you don’t have to repay the debt, whether it’s been charged-off or not. Typically, the age of the debt has to be anywhere from 4-6 years before this is the case, but because these regulations vary by state, it’s best to check your local laws to be sure you’re in the clear.

Myth: Credit Repair Services Can Erase All Negative Credit Information, Even if it’s Legitimate

Reputable companies won’t promise to erase legitimate debts. Under the Fair Credit Reporting Act, you are allowed to challenge debts that you believe to be erroneous or questionable. That does not mean that you should challenge any and all debts. In fact, doing so may result in collection agencies and bill collectors ignoring any legitimate requests you may make to have truly erroneous information removed. This is because if the company feels that your dispute is ‘frivolous’ they can ignore it, and leave the debt on your credit report.

There are numerous ways to have negative items on your credit report removed. Disputing them is not the only way. If the debt is legitimate and being reported correctly, you may want to try to negotiate a pay for delete. When using this method, remember to always get the terms in writing.

Your best bet is to choose a credit repair service that has a reputation for success, and that uses ethical and legal methods to improve your credit score. You may not be able to get rid of all negative information, but the removal of even a few items could see your credit score improve dramatically.

Paying Off Old Debts Will Improve My Credit Score

Surprisingly, paying off old debts will not always improve your credit score, and may actually worsen it. This is because paying on an old debt can sometimes make the debt appear to be new. If the amount you owe is substantial, this can make it seem as though you’ve just taken on a lot of new debt. While the credit bureaus are working on finding ways to eliminate this setback, currently there is still a chance you could see your credit score fall as a result of old debts being paid. Be particularly vigilant when it comes to knowing when your debt’s statute of limitations for collections has run out – you don’t want to pay on a debt that is no longer enforceable by law unless there are very special circumstances.

Keeping the truth behind these three myths in mind can help you to avoid unnecessary declines in your credit score. If you need help improving your credit score, always deal with a reputable agency, and be sure to check the facts to be certain the law is on your side in your quest for better credit.