As far as the personal finance concern is concerned, it is hard to think of a more unpleasant word than ‘collections accounts.’ Several people experience this feeling of financial ostracism as stress-inducing and confusing because these entries are the dreaded black marks on credit accounts. But what is a collections account? What does it do to your finances? More importantly, what can you do about it if you now have to deal with this issue?
This is the most encouraging, interesting, and fullest discourse on anything related to collections accounts you have encountered. It reserves no effort in looking through all the components of these accounts to enable the reader to manage it for their benefit. If you are currently in a collections account or would like to preempt such a scenario in the future, this article will inform you so that no such threat is imminent.
What Do You Mean By A Collections Account?
Meaning and Basic Matrix
When a creditor or other lawful lender that advanced money to a borrower cannot retrieve the amount lent, the said amounts are written off, and a collections account is created. This often occurs when the original creditor has repeatedly attempted to collect a debt but has given up hope of recovering it by trying to do it themselves, which is deduced to be pointless.
The accounts in collections may arise out of different categories of debts owed by the individual, such as:
Credit card debt
Healthcare expenses
Electricity/water bills
Cash advance
Finance for car
Phone bills
Accounts in collections indicate that the original lender has practically abandoned the debt recovery themselves and has either sold that account to a collection agency or contracted them to do so.
The Collections Process
Usually, the collection process gives a step-by-step timeline;
Initial Delinquency: One date on their account passes without making the due payment.
Grace Period: The creditor may exercise 30-60 days wherein no action shall be pursued.
Internal Collections: The creditor’s office collecting overdue payments will try to retrieve the debts.
Third-Party Collections: If the internal agency does not succeed, the account is passed onto an external agency in exchange for some fee.
Credit Reporting: The accounts handed over for collection are filed with the credit rating companies.
Gaining this knowledge may assist you in understanding your position whilst sharing with you which actions should be taken to close this gap.
How Collections Accounts Affect Your Credit
Impact on Credit Scores
Bad debt or debts that have gone into collections can negatively affect your credit scores. The severity of the effect varies depending on such factors as:
The scoring system that is used to analyze the credit report
Your actual credit score
How old is the collections account
Balance
In any case, it has been observed that the credit score may fall by between 50 and 100 points for a collection account, and in many cases, it may be a minus or a little more. This reduction is more extreme, especially when accumulating earlier on excellent or good credit.
How long do these Collections Accounts stay on credit Reports
A collections account is typically reported for a period of 7 years based from the date of the first default in payment that originated the account to be transferred to debt collections. This is even so if you pay back the liability in the near future.
Nonetheless, debtors will do this since they know a collection account will stay on a credit score for a certain period. However, it is noteworthy that with time and after the debtor has limited their credit usage on other fronts, the effects of the collection account will become less noticeable.
Impact on Future Borrowing
One of the drawbacks of having a collections account is
Getting new credit
Getting favorable terms of credit
Renting a house
Getting hired in specific positions
Anyone with collection accounts and anyone who looks at your credit would interpret that you have high risk and will only cause collection problems.
Collections Accounts Types
Credit Card Collections
Many consumers go to debt collection because of their credit card-related debt. This happens when a credit card customer stays in arrears for several months or more. Credit card businesses sometimes operate their internal collections departments, but in most cases, extremely overdue debts are outsourced to outside collection agents.
Medical Collections
Another frequent type of collections account is medical collections. Medical bills are especially concerning to consumers as the billing process may include errors, disputes with insurance, and unforeseen and immediate medical emergencies. It should also be noted that due to some recently made changes in the credit reporting rules, medical collections affect credit scores in a lower way by removing adverse impacts from medical collections that have already been paid.
Utility Collections
If one bill remains overdue by the customers, these can be utility bills, including electricity, gas, or water. These are mostly seen when someone forgets to settle a final bill upon moving house or when they are going through financial strain and avoid any payment towards that debt.
Auto Loan Collections
When you are way overdue on your payments for a car loan, sooner or later, the lender will have no option but to turn the account to a collections company. This is usually towards the looming threat of the house being taken or the car.
Personal Loan Collections
These, too, are prone to the collections process, whether the outstanding personal loan is offered from a bank, a credit corporation, or an online lender. Most of them adversely affect the credit score as they are above the most common debt most people have, credit card debt.
Your Rights When Engaging Collection Agency
The Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act is a law primarily meant to prohibit debt collectors from dealing with consumers in an abusive, unfair, and deceptive manner towards them. As a matter of fact, the FDCPA provides for the following about collection agencies:
They have to make it clear that they are consumer representatives of the debt collection Company.
Don’t phone you at specific unreasonable hours, e.g., before 8 AM and after 9 PM.
Request that they not contact you in writing; such requests must be observed.
Use of Emotions/Abuse is Prohibited.
Respond if you have a request for the verification of debt.
Knowing and capitalizing on your rights outlined in the FDCPA can enhance your capacity to negotiate with collection agencies and protect you from unscrupulous collection practices.
Statutes on limitations
All states have a statute of limitations for the collection of a debt which refers to the time frame that a creditor (or a collection agency) can bring a lawsuit against you in a court of law to recover a debt. The statute of limitations depends on which state you are located in and the debt type, and it is often around three to ten years.
On a related note, it should be noted that:
The statute of limitation commences from the day of the latest payment made about the debt or the last day when you acknowledged the debt.
Paying a debt or admitting to owing that debt renews the time frames of limits on the time an action may be brought.
This means that even where the time limits for suing are gone, the debt still exists and may be captured in the credit history.
The above discusses why it is important to know the statute of limitations in your region, as it will help resolve old debts.
Strategies for Dealing with Collections Accounts
Verify the Debt
Following up on the collections account is important to ensure that the debt is valid in the first place and that the collections agency has the authority to carry it out. This is possible through:
Writing a request for a debt verification within 30 days of the first being contacted by a collector.
Checking the information received against your information.
Ascertaining if the debt has expired under the statute of limitations.
If the debt cannot be substantiated or it is above the statute of limitation time, it could be argued and settled as a dispute.
Negotiate a Settlement
Where the debt has been verified and accepted as real, there is a possibility of resolving the outstanding debt for an agreed position that is less than the debt amount. Collection agencies buy debt for much less than the original value, so they want to find a reasonable negotiation position.
Suggestions for effective negotiation:
Make your initial offer quite low, between 30-50% of the total due amount.
Ensure that all agreements are captured in writing before paying any amount.
A “pay for delete” settlement is a possible option where you pay off the account’s value, and the collector, in return, agrees to delete your account from the reporting agency.
You should also remember that a debt settled for less than the owed amount can also raise tax issues in that any canceled debt may be counted towards taxable income.
