If a consumer has an unpaid debt in collections, the comment “bad debt & placed for collection” may be added to the account when reported to the credit bureaus.
It is typically the result of debt having gone through a period of non-payments and unsuccessful steps in order to recover it.
An internal retrieval effort is initially administered until such time as all options to resolve are exhausted, after which the collection authority is then handed over to a third party agency.
The term “skip” may be added to the statement if the account has been skip-traced, which is the process by which the contact information and whereabouts of a delinquent borrower is tracked.
This is required particularly when the borrower has gone ‘missing’ in attempts by the creditor to establish contact.
Note that this is generally a red signal for lenders and has the potential to impact your credit score if handled improperly.
Despite the blemish this would have on your credit report, statutory regulations afford you legal rights that need to be respected.
The same regulations facilitate the debt recovery process by a collections agency, outlining boundaries and rules that must be adhered to.
Can debt collectors find you if you move?
Even if a debtor moves, a creditor will eventually find out where they are living and continue to make collection efforts.
The process of locating a debtor is called a skip-trace, and it is initiated to locate and serve the borrower with a petition to pay the delinquent debt.
When a skip-trace is filed, debtors are tracked through public and sometimes private records. A skip-trace comment will typically be added to the debtor’s credit report.
This comment is helpful to other creditors because it signals that the address and phone numbers provided by the consumer may not be valid.
It also indicates that the creditor who filed the skip-trace has made attempts to locate the borrower in order to recover delinquent payments.
What happens if your debt is sent to collections?
If the internal debt recovery department is unable to create a solution or maintain consistent contact with the customer, the loan is eventually charged off (written off as a loss) and referred to a third party collection agency.
The creditor has declared the debt to be unrecoverable and is considered a financial loss.
The debt will be reported to the credit bureaus as “bad debt & placed for collection”.
The collection agency will act on behalf of the original creditor and will begin making contact with the borrower in a renewed effort to collect the debt.
It may or may not report the debt as a separate derogatory tradeline on a customer’s credit report.
It may be worth contacting the agency as soon as you can to work out a settlement to avoid potentially having the tradeline being reported before any formal collection is initiated.
Otherwise, once it’s been initiated and efforts fail to resolve the debt after a designated period of time, it will eventually be sold to a debt buyer.
Debt buyers are companies that purchase debt for dirt cheap in mass quantities.
They buy the debt and begin the collection process all over again.
If they are successful in getting the debtor to pay, all payments made by the debtor belong to the debt buyer.
Often this is made easier by the collection agency by offering low settlement amounts and “pay to delete” options.
If a “pay to delete” is included as part of the settlement, the borrower is essentially requesting for the collection agency to delete the account from credit reports with Transunion, Experian and Equifax.
This can be done after payment agreement has been fulfilled.
Collection agencies may be reluctant to do this, so it is up to the borrower to negotiate with this in mind.
How do collections impact credit score?
Collection activity is derogatory credit and it will negatively impact credit score as long as the collections remain, and illustrates the debtor’s failure to pay when accessed by potential creditors.
They are typically unpaid accounts that are reported due to non-payment, such as:
- accounts charged off from credit cards
- medical bills
- any unpaid debt
The creditor chooses to report these for non-payment and then assign them to a collection agency.
Regardless of the reason (and there are many legitimate reasons why people can’t pay their bills), collections are considered as having the most hurtful impact on a consumer’s credit report.
One reason is that it generally takes a significant length of time for a debt to be turned over to collections. From the point of view of the creditor, this signifies an intentional long term refusal to pay.
Potential lenders and current creditors will most likely view the debtor as high risk. As a result, the ability to borrow money in the future becomes extremely limited, if not unlikely.
In a perfect world, all delinquent debts should be paid as originally agreed. However, life sometimes prevents things from happening as they should.
If it is impossible to pay the debt before they are placed in collections, it may eventually be possible to settle after assigning the collection authority to a third party collection agency, or eventually with a debt buyer.
Sometimes the opportunity arises years later to settle outstanding debts. While it is a personal decision, it speaks well to creditors that an effort was made.
Can paying off collections raise your credit score?
Paying off your collections will not raise your credit score as long as the associated derogatory statement remains.
Typically, the statement will remain on your report for 6 years and 9 months, and it is at the beginning of this timeframe when the impact is at its peak.
As time progresses towards this mark, the effect gradually declines before being completely deleted from the credit file. This is not to say that paying down your collections to zero-balance will not have any benefits.
In fact, lenders that use the FICO scoring system to vet a potential consumer’s credit history, will not take into account any zero-balance collections.
This means that the lender would perceive you to have a higher score as opposed to a lender that uses a scoring system which does not ignore zero-balance collections into its algorithm.
However, this is not to say that you cannot achieve a good credit score despite having collections present on your credit report.
What can and can’t a debt collector do?
The Fair Debt Collection Practices Act (FDCPA) is the primary regulation governing collection practices in the United States.
It provides specific guidelines for third party collectors, that is, anyone collecting on behalf of another (e.g. Collector XYZ calling on behalf of Bank of America).
Anyone who is contacted by debt collectors should review the FDCPA online to fully understand what is and isn’t allowed by the collector.
It will also outline what is and isn’t required of the debtor. The document is comprehensive and includes:
- When, how, and how often a third party debt collector can make contact, including hours of the day and how many times per day a collector may call.
- Who the debt collector can contact and what may or may not be discussed.
- A debt collector is allowed to call a debtor at work, but must cease immediately when instructed by the debtor to stop calling.
- It is illegal for debt collectors to coerce or intimidate debtors in an attempt to make them pay.
Can I add a collections debt to my bankruptcy?
Yes, collections can be included in a bankruptcy.
Collectors are not allowed to make contact with the debtor, or attempt to collect the debts in any manner, while the bankruptcy is in process.
If the collections are discharged (no longer owed), it is illegal for a debtor to attempt collection on these accounts.
If there is no hope of repaying the debts, sometimes bankruptcy is the most practical option.
What happens if I don’t pay a debt collector?
If collections are never paid, they remain on the borrower’s credit report 6 years and 9 months from the date of last activity (or date of delinquency).
There is nothing to prevent a debtor from waiting until the debts age out, but the negative impact will be felt as long as the derogatory accounts remain on the credit report.
There is also the risk that the collection agency may file a lawsuit against the debtor and/or place a lien on their property, the process of which could prove very costly.
Much can happen over the span of 7 years, and it is likely that most consumers will need access to credit at some point during that period of time.
It may be well worth the effort to repair credit damage as soon as financially possible, and move forward without old debts hindering future plans.