If you're one of the millions of Americans whose credit history isn't exactly perfect, you might get the occasional call from a bill collector.
While this is not too big of a deal if you know what you owe and who you owe it to, the reality is rarely that simple. Debts are sold and traded among various collection agencies; so how do you know if yours is legit? And, what should you do about your collectors after you verify their right to collect?
Is the debt legit?
Sometimes, debts get passed around from collector to collector so often that you aren't sure who you even owe money to. And, unfortunately, there are "collection agencies" that will try to collect on a debt they don't own.
To help solve this problem, a company called Global Debt Registry has developed a free service called Debt Lookup. Basically, the service works like checking the title of a car. By searching for your debt, you can figure out who owns it and can legally collect on it. Unfortunately, the service is very new, and only a small fraction of the outstanding U.S. consumer debt is registered with the service.
Another method to verify a debt's legitimacy is to ask for proof in writing, including who the original creditor was. New regulations require lenders to keep track of debt they sell to collectors, so if it's a recent debt, you could try contacting the original creditor to determine who currently owns the debt.
If it is legit, should you pay your old debts?
Under the current law, collections accounts and judgments remain on your credit report for seven years from the time the account first became delinquent. Because of this, a lot of consumers believe that the obligation to pay the debt disappears when the reporting stops. This is 100% false.
Debt collectors can attempt to collect debts, even after the seven-year window expires. It's not uncommon to receive collection calls, or letters attempting to collect debts, that are a decade or more old. However, these collectors cannot report the debt to the credit bureaus, nor can they pursue legal action against you. They can, and will, bombard you with collection attempts.
Whether or not you decide to pay or settle old debts is up to you. That is a moral discussion, and is not really in the scope of this article. However, attempts to collect on them are indeed legitimate, and the collection efforts can, and will, continue for years and years. Just because the credit-reporting window expires doesn't make the debt go away.
How to deal with creditors
It used to be the case that, if you settled a debt for less than its original value, it would still count against you for credit-scoring purposes. However, under the recently announced FICO rule changes, this is no longer true. As of the latest scoring model, any debts that are paid in full, or settled, will no longer count toward your score.
So, now more than ever, it's in your best interest to work out the best deal possible with your creditors. And, you may be surprised how much negotiating power you have, especially on a debt that is several years old, and was likely acquired by the collection agency for just pennies on the dollar. It's not uncommon for debts to be settled for less than half of their original value.
Just remember -- whatever deal the collection agency offers you, get it in writing. A verbal promise to accept $200 to settle a $1,000 credit card debt is simply not good enough. After all, what's to stop the collection agency from claiming you still owe $800, and "having no record" of the phone call?
What if it's not a legitimate debt?
If you do your research, and it turns out the collector in question doesn't actually own the debt against you, the Consumer Financial Protection Bureau can help you handle the situation. You can start by filing a complaint on their website, detailing what is happening. If that doesn't work, you have the right to sue debt collectors for this and other violations of the Fair Debt Collection Practices Act (FDCPA).
The best course of action
Obviously, you should go to great lengths to deal with unlawful debt collection practices, especially for debts you don't owe. However, if a debt is legitimate, and is less than seven years old, it's definitely in your best interest to negotiate a lower settlement amount. After all, if an old collection account is the only source of negative information on your credit report, eliminating it from the calculations can tremendously boost your credit score.
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