Best way to address legitimate unpaid collections
March 9, 2006 11:14 AM   Subscribe

Credit Repair: is the best/fastest way to deal with legitimate unpaid collections on one's credit history to simply pay them off, or to go through some other process? Tips and tricks of the trade?

I have unpaid collections from medical expenses incurred while unemployed and sick. Near as I can tell they're the only real blemish on an other otherwise good credit history, but they're significant enough that they could make potential real estate purchases more expensive and need to be addressed quickly if possible.

Cash flow is not a particular problem at the moment. I have no more credit card debt or other expensive debt, I have some reasonable savings, and I therefore have the means to simply contact each collection company and pay them outright and be done with it. If things really are that simple, I'm completely content with that solution.

However, some preliminary investigation suggests to me that this actually may not be the most effective way to address the issue. Apparently there are various challenge processes one can go through, even if a debt is legitimate, or tactics for working with collection agencies to have reported issues quickly updated or even removed. If any of these have a significant positive effect either on the speed or amount by which my credit improves, and are not incredibly time intensive, I'm game to try.

So, if you're familiar with any of these procedures, please share! If you're not, but are familiar with good resources or organizations where I could find out more, feel free to point me in that direction.

Finally, yes, I realize the ethical thing to do is pay the debts rather than challenge them. The only reason I'm considering playing any games with the system is that as near as I can tell, the credit system is a game. If by some chance I end up winning, I have no problem sending checks to the original service providers.
posted by weston to Work & Money (13 answers total) 4 users marked this as a favorite
You've figured it out - gaming the system requires time - so if you've got the time to play it out (call it 4-6 months, depending on the issues) then you can work through the challenges, etc. I have been there, and this is exactly what I did to pull my FICO score up over 100 points.

Usually, but not always, the collection agency has purchased the delinquent account from the creditor for pennies on the dollar. Sending money to the original creditor at that point is moot - they're the ones who bought the debt. You can, sometimes get that cleared with the ORIGINAL creditor but the process involves lots of letter writing, and there's no guarantee that they'll fix it with the collection agency.

A quick method of negotiation would involve calling the collection agency, and asking for a settlement. Pro: You pay less, the debt is considered satisfied, account is closed. Con: Some of them will report the account as "Settled" or "Settled for less than full amount."

Paying the full balance will show "Paid in Full." I have not been able to determine which of those statuses has a higher value, but Paid In Full would seem to be better. You do what you can.

The upside is that paying these things off/settling will increase your FICO score - usually within 30-45 days of the payoff. The downside is that the fact that they were charged off means they will sit there as charge offs, even if they are paid, for seven years - I have five or six of these sitting on my credit and they won't start coming off until fall of 2007 into 2009.

Once they're paid off, join a credit-report monitoring system that will allow you to check your report on a regular basis, and make sure that the stuff is accurate.

Finally, draft a letter explaining EACH of the derogatory accounts and what you did to clear each balance. Be specific about dates, times, amounts. Have that letter handy when you go to apply for a mortgage - especially if you do an FHA loan. They will want to see active involvement in paying the stuff off. One year of clear history after paying off the last account will usually help you with getting your mortgage.

posted by TeamBilly at 11:30 AM on March 9, 2006

The way I understand it, you sometimes *can't* pay back the original service provider because they no longer own the debt. They sometimes sell these debts to collection agencies, so that's the only way you can pay them off--through the agency. Probably not always the case, but it definitely is some of the time. Call your service providers and inquire before you try to pay off the debt that way.
posted by lilybeane at 11:32 AM on March 9, 2006

You can also write a letter to credit agencies, and have it attached to your file, explaining what the deal is. It doesn't actually change the number but I have heard that it does have an impact on people deciding to loan you money or not. You are exactly the person this option is made for - you have a good reason for what happened and it's an isolated incident. A low-ish score with a good explanation is way better than a low-ish credit score and no explanation.
posted by selfmedicating at 11:35 AM on March 9, 2006

To be clear - write a letter to the credit reporting agencies, the ones you get your credit report from.
posted by selfmedicating at 11:36 AM on March 9, 2006

join a credit-report monitoring system that will allow you to check your report on a regular basis

Total rip-off. Just use your free annual credit report instead.
posted by grouse at 11:37 AM on March 9, 2006

I had a store card that went to collections, once. My partner at the time had assured me that they had paid the bill when I asked, and I stupidly believed them, and the next thing I knew I had a notice from a collections agency -- the balance (just a few hundred bucks) had been charged off and I now owed the money to collections rather than the original store. I was frantic, and paid off the amount due as soon as I could.

Fast forward to about three years later and I tried to apply for an credit card. They turned me down, in part because of that chargeoff which still appeared on my report. I had paid it in full, but the fact that I had a chargeoff, even one that was resolved, was enough to contribute to my credit being fucked. (I tried contacting the original store and tried to get it removed, and tried talking with the credit reporting agency, but no dice. "You were delinquent, it's on the record, we can't change that.")

It seems to me that it ultimately made no real difference and I might just as well have just kept the money instead of sending it in. I don't know if my situation is unique, but when another bad situation came along later and I was sent to collections for another matter, I ended up just deciding, "Screw it, I'm fucked for the next ten years whether I pay it or not." End result, I had to put down a rather large deposit to get a cellphone in my own name, and an extra month's rent to get my current apartment, which wasn't fun, but after the way I was treated for that one isolated incident, I feel like it would have happened anyway. Oh well.
posted by Gator at 11:48 AM on March 9, 2006

Response by poster: Thank you for the excellent advice so far. I realized I should mention something else -- why I'm worried about speed:

I am able to qualify for a mortgage loan at about 7% at the moment. Best guess if I cleaned up the credit report would be that could get about 6%.

7% is workable and not totally evil, but obviously 6% could save me a lot of money, and so working the credit report could be a big benefit.

On the other hand, if I wait 6 months to a year for a resolution, there are two potential changes:

(a) obviously interest rates rise and fall. If I'm able to improve my score to where they'll cut a percentage point off the rate, that's good, but what if rates rise a point in that time? It seems likely...

(b) I will likely need to leave my current employer within 6 months. I understand a 2+ term with your employer counts as a big plus in determining the loan rate. I have that now. If I leave, I obviously won't for another ... two years.

So essentially, not only am I looking at how to navigate the process of cleaning up a credit report, I'm trying to weight the benefits of doing so and waiting, versus taking advantage of the things I have going for me at the moment (current rates and term with employer). Any advice speaking to that would be extra helpful!
posted by weston at 12:11 PM on March 9, 2006

join a credit-report monitoring system that will allow you to check your report on a regular basis

Total rip-off. Just use your free annual credit report instead.

Also problematic. Credit reporting agencies (Experian, Equifax, TransUnion and the minors) get 45 days to respond to a dispute arising from a free CR but only 30 if you pay. Depending on how hard you're working this it can be important or even just for the sake of disputing something before a loan app.

Everything you never wanted to have to know about credit repair and the like is usually available on but they seem to be having issues at the moment. Here's some critical things to know in a nutshell.

Note: the exact FICO scoring model is a trade secret so we don't know EXACTLY how it works but there's pretty well-educated guesses out there now and most of what I say after this is based on that understanding.

The unfortunate reality is that FICO scores are impacted little, if at all, by the difference between an entry that says COLLECTION and one that says PAID COLLECTION and CHARGE-OFF or PAID CHARGE-OFF. The upshot of this is that from a pure points model you'll get a better score if you have something on your report from 12 months ago that you never paid for rather than something from last month that you settled up on.

I think it stinks that there's no recognition of someone Doing The Right Thing and in fact you will be penalized since entries are given more weight the newer they are. Since newness is based on DOLA, date of last activity, that includes making a payment. If you have two identical deadbeats with identical scores and one decides after 6 years and 11 months to pay everyone his score will TANK. The next month the unrepentant deadbeat will have a clean report as everything hits the 7 year reporting limit. The one who made good will have to live with those negatives for another 6 years and 11 months.

The upshot is, don't just pay. You want to negotiate what's called "pay for deletion." The CRAs and lenders hate it but it's a fact of life. The law dictates that all reported information must be accurate. However it does not dictate that all information must be REPORTED. They'll resist and you may have to find yourself some leverage to make it happen (so for your sake I hope AoC comes back up) but it can be done.

As far as waiting, don't. The only reason to wait is if you're close to a statute of limitation expiring. Once it has you have the ultimate leverage to get PFD: if they don't agree to your terms they cannot force you to pay and they get $0.00. Beyond that you can expect this to be a drawn out process so the sooner you start the better.

On the issue of your loan rate perhaps you can find someone who has experienced this directly to weigh in on, but I offer this concern. I have heard of many lenders insisting you settle all outstanding chargeoffs, so be careful - if you pay off someone and update the DOLA you could lower your FICO score and make your rate worse. I don't know if it's possible to lock in your rate before you pay off those people and possibly change your score, but you should look into it.
posted by phearlez at 12:45 PM on March 9, 2006

Total rip-off. Just use your free annual credit report instead.

This only gets you three a year (from various agencies).

However, I will note that if your have a Providian credit card, you can see your score for free, and they update it each month. It's from TransUnion, the smallest of the three agencies and not everyone reports there, which means it may not match your Equifax and Experian scores exactly, but hey, it's free, and it should be good enough to see the trend if not the exact number.
posted by kindall at 12:46 PM on March 9, 2006

Total rip-off. Just use your free annual credit report instead.

Not if you use one that runs a FICO model.

For what it's worth, and it's been mentioned here in other threads, high FICO scores reflect large amounts of un-used revolving debt. Two or three credit cards with 10K limits and no balance for a long time, coupled with no late/slow pays and low debt-to-income ratios generate the highest scores.
posted by TeamBilly at 1:10 PM on March 9, 2006 is a great resource for this -- Consumer forums.
posted by arimathea at 2:16 PM on March 9, 2006

"Total rip-off. Just use your free annual credit report instead."

Kind of hard to ensure that your credit reports are being corrected if you only check once a year.
posted by mischief at 5:27 PM on March 9, 2006

Mischief, you can check each of the agencies once a year, so it's recommended you check a different one every few months.
posted by stefanie at 5:50 PM on March 9, 2006

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