Dealing with Collection Agencies

If you've left a bill unpaid for so long that it's been turned over to a collector, your options and choice of best tactics have changed.

No longer can you hope to elicit the creditor's interest in rehabilitating your debt and keeping you as a customer. At this point, your account typically has been “charged off”—an accounting term that means the creditor has decided that repayment is unlikely. The creditor usually takes a tax write-off for the loss and passes the account to collections.

Some creditors do their collections in-house using a special department. Others give the accounts to outside collection agencies on a “contingency” basis, which means the collector keeps a portion of what's collected. Finally, a creditor may sell its overdue accounts to a collection agency outright for pennies on the dollar. (The price drops the older the debt or the more difficult the collection is perceived to be.)

In general, in-house collectors are the most flexible and the most likely to modify how the negative account appears on your credit report if you can repay or satisfactorily settle the debt.

But if you can repay even part of your debt, you should negotiate with a collector as to how the debt will be reported to credit bureaus. Most have more flexibility than they're willing to admit to erase or minimize negative marks.

Here's what you need to keep in mind:

Don't talk until you have a plan. Collectors really aren't interested in your tales of woe; many just assume you're lying, no matter what you say. You also don't want to make a bunch of promises you can't keep, especially if the debt is still within the statute of limitations; the collector might get annoyed and decide to sue.

Fortunately, there are plenty of ways to dodge collection calls until you're ready to talk:

• Use your answering machine to screen calls or employ caller ID or distinctive-ring features so that you can let the collectors' calls go to voice mail.

• Disconnect your home phone and just use your cell phone. Cell phone numbers usually aren't public and are much tougher to track down than land lines.

• Just hang up.

More-mobile debtors make themselves harder to find by moving and not leaving a forwarding address and by getting a private mailbox for their correspondence.

You have another option: writing the collector and telling them not to contact you. Unfortunately, some collectors respond to these letters by filing a lawsuit against you to collect the money.

In any case, dodging a collector is a temporary solution at best. You'll want to come up with a plan that actually deals with the problem—and the sooner, the better.

Know your rights. Tiffany owed $2,000 on her Visa, an account that had been turned over to a law firm for collection. Then she got an unexpected call—from someone who claimed to be a sheriff.

“[He said] that if I didn't return the call from the collector (about the debt), a warrant would be issued,” Tiffany said.

Of course, the call wasn't from a sheriff. Owing money typically isn't a crime, and local law enforcement doesn't issue warrants for credit card debts. Posing as a law enforcement officer is a crime, though. Unfortunately, it's such a common tactic that it is specifically prohibited by the federal Fair Debt Collection Practices Act.

The act governs what third-party collection agencies can and can't do in pursuit of a debt. It's well worth reading. It is available on several Web sites, or you can get the Federal Trade Commission's pamphlet on the issue by calling 1-877-FTC-HELP.

Here are some very common practices that are actually illegal:

• Calling you at odd hours, such as before 8 a.m. or after 9 p.m.

• Calling you repeatedly

• Calling you at work if you've made it clear that your employer doesn't allow such calls

• Telling others, such as your friends, family, or neighbors, about the debt

• Using obscene or profane language

• Threatening any action that they don't intend to take or that they are barred from taking, such as suing you over an out-of-statute debt

Collection agencies and other creditors also aren't allowed to change the date on a delinquent debt to make it appear younger than it actually is, but such illegal practices are still surprisingly widespread.

Collectors also may fail to follow the law that governs what information they are supposed to provide you. Within five days after contacting you, the collector is supposed to send you a written notice telling you how much you owe, the creditor's name, and what you must do if you believe you don't owe the money.

If you send a letter disputing the debt to the collector within 30 days of getting the written notice, the collector is required to either send you proof of the debt, such as a copy of the bill for the amount owed, or cease collection activities.

Again, violations of the laws governing debt collection are so common that some borrowers have made a pastime out of suing collectors that break the law, since consumers can collect up to $1,000 per violation in small-claims court. One of my readers, a tax preparer in Tucson, told me he collected $5,000 from collection agencies in a single year in small-claims court.

You also might consider visiting one of the many Internet message boards such as CreditBoards.com, ArtofCredit.com, CreditNet.com, and CreditInsiders.com, where battle-hardened debtors share tips and ideas for dealing with creditors. Since tactics change constantly and vary by agency, these can be an invaluable resource. Just remember that anyone can join these forums; take the advice with a grain of salt and don't rely on them for legal advice.

Negotiate hard. You'll be in the best negotiating position if you can offer a lump sum to settle the debt. But even if you can offer only payments, try to offer less than you can actually pay. You might be surprised at how quickly your collectors agree to settle.

Since settlements can really hurt your credit score, you should try hard to get some kind of concession from the collector about how the debt will be reported to the credit bureaus. Ideally, all traces of the original delinquency and subsequent collections would be deleted from your credit report. Often, though, the original creditor isn't willing to erase the late payments or charge-offs. However, you may be able press a collection agency to remove the collection action, which may help your credit.

If deletion of the collection is not possible, try to get the account reported to the bureaus “paid as agreed” or “paid” rather than “settled.”

Some collectors take money from a debtor and then wind up selling the unpaid portion of the debt to another collector. Or a collector might report the unpaid portion as “forgiven debt” to the IRS—which promptly sends you a tax bill.

Dennis in Minnesota didn't know this was a possibility when he negotiated a settlement with a collection agency. He had recently found a job after an extended period of unemployment and was eager to put this debt behind him and begin rebuilding his credit.

“The debt was settled for about 50 cents on the dollar,” Dennis wrote me. “A few days ago I received a notice from the IRS that I had failed to report income on my 2003 tax return. It turns out that the IRS considers the [unpaid debt to be] income. I had never considered this at the time and still cannot see how this can be considered income. But the IRS is the IRS, so I will pay the taxes that are due as soon as possible. I will also have to file an amended state tax form to finally get this matter straightened out.”

If Dennis had known about the potential tax treatment of unpaid debt, he might have been able to negotiate with the collection agency not to report it to the IRS—or he could at least have put aside some cash to pay the bill.

Interestingly, some borrowers report that collection agency representatives are more willing to play ball at the end of the month. These folks are usually paid on commission and may be facing quotas, just like car salespeople.

Trust no one. Obviously, with deception so widespread, you want to be skeptical in your negotiations. Just as the collector assumes you're lying, you probably should assume the same about him or her. Some collectors will promise you just about anything in return for a payment and then renege.

Margaret thought she had a deal with the collection agency that took over her credit card debt:

“I agreed to pay the debt by sending $100 a month if they would not add any finance charges [or interest to the debt],” she wrote. “The debt started at $3,294, and after six months my debt is at $3,271, only $23 less, [even though] I've sent them $600.”

You'll want to get any agreements you make with a collector in writing and in advance of sending any money. In fact, you should document everything about your negotiations. Keep good notes, and tape your conversations if at all possible. (In some states, it's okay to record a telephone conversation without the other party's permission, but to be safe you should tell the other party what you're doing.)

Whatever happens, don't give a creditor a postdated check or agree to automatic payments drawn from a bank account or charged to a credit card. Give collectors as little information as possible. Don't reveal bank account numbers or where you work, for example.