Once a debt goes unpaid for an extended period, creditors will turn the balance remaining over to a collection agency, damaging credit. Most lenders or credit issuers expect these accounts to be cleared up and the credit profile to be in good standing before the borrower can qualify for new accounts.
For the debt collection to be removed from a credit history, the debt must be paid in full, and the creditor must agree to remove the red flag from the profile. They don’t always agree to remove it; sometimes, they will simply mark it as “paid in full” while the red flag stays on the profile.
Many lenders will avoid borrowers with collections on their history, particularly with unsecured loan products because the primary consideration is whether the borrower will repay the debt or default. That’s especially true in Norway with lån på dagen med betalingsanmerkning (loan on the day with payment notice.)
Borrowers with payment notices will be rejected until these are paid in full and the mark removed from their history.
Some Lenders in this country will allow borrowers with collections to pursue a consumer loan if they have proof that they’ve paid a significant portion of the collections, or a repayment plan has been set up.
As a borrower, reviewing lenders’ criteria and your credit profile before applying should be prioritized, especially if you’re unsure of your credit standing.
This will give you the opportunity to dispute any discrepancies if there are collections that don’t belong to you or clear up those outstanding that are part of your profile. Let’s look more closely at debt collections, what they are, and what they can mean to your credit and potential for a loan.
Instead of going in blind, it’s beneficial to know ahead of time what loan providers look for on credit reports to be prepared. Creditworthiness is a primary consideration with the loan approval process. This tells a lender what type of borrower they can expect.
Reviewing the history helps a lender understand the financial behavior up to the current point. Debt collections, delayed payments, or maxed credit cards present an unreliable candidate.
Checking your credit details ahead of applying for a loan will put you in a better position since you can make the necessary corrections and adjustments. Should you repay collections, and how does that work? Let’s learn about the collection process.
What To Do When Debt Goes To Collections
When a debt goes to collections, a third-party agency works to collect the balance due for the creditor. Typically, a creditor or lender will use this as a last resort after several months of non-payment and no contact from the borrower. The account will be sold for virtual “pennies on the dollar.”
As the borrower, an account being in collections damages credit to the point the likelihood of approval of new credit or loans is greatly diminished. Lenders and credit card issuers use creditworthiness to discern if a client will repay debt.
With a history that displays recent collections, loans will be rejected unless these are corrected at once and removed from the profile. What are the recommendations on handling debt that has gone into collections or if you check your credit report and have collections showing? Let’s learn.
· Validate that the debt belongs to you
Validating that the debt belongs to you should be a priority before trying to make any repayments to a collection agency. You should have records of the transactions with the balance equaling the amount the company charges.
You should also contact the business with whom the debt was made to ensure this is the agency they sold the account to and verify the balance with them as well. Errors occur all the time, making it necessary to confirm the debt before taking any steps to rectify the situation, especially if you can’t recall the details.
If, after taking these steps, you don’t believe this debt belongs to you, a dispute letter must go to the collection agency within 30 days of their initial contact. The agency has to cease contact once they receive a dispute until they can send a validation of the debt like an original invoice.
· The local statute of limitations for your state should be verified
A statute of limitations exists for each state. This is the max amount of time to actively collect a debt. Borrowers have the power to reactivate the debt by reaching out to the debt collector or issuing a payment.
It’s wise to find out what your local state regulations are before moving forward, make sure the debt hasn’t been discharged in a “bankruptcy” capacity or through another means.
· Learn your rights with debt collection
The Fair Debt Collection Practices Act – FDCOA, has set guidelines stipulating how debt collectors can communicate with borrowers within appointed time frames, disallowing contact at work if you’ve instructed them against it, and they are prohibited from sharing your private details with anyone else.
The agents are prohibited from harassing, verbally abusive, or threatening with their approach. You have the right to remind them of the Act if they don’t follow the guidelines and to report them online to the Consumer Financial Protection Bureau.
· Decide the amount you can comfortably repay
When it’s determined this is your debt, and you want to correct it, you’ll need to evaluate your finances and set up a budget to allow for a comfortable repayment. If you decide to try to eliminate the balance upfront, that can mean cutting corners to avoid affecting the other monthly obligations.
You might have to take on an extra job, perhaps ask for a raise or work extra hours with your primary employer or spend less on entertainment or luxuries. Remember, if you do pay the full amount, you need to speak with the debt collector about deleting the account from your credit report.
That’s important if you want to be approved for loans or credit cards. If they don’t remove it, they often will mark it as “paid in full.” This will usually suffice for most lenders and issuers and can help boost your credit score.
Some collectors won’t agree to either request, but it’s worth asking since you’ve tried to correct the situation when some people don’t do that. Go here for guidance on negotiating with debt collectors.
When All Is Said And Done
Once the debt collection has been repaid, the company’s “signatory” should supply a completion letter; if not, ask that they do this. Also, you must ensure your credit report is correct following repayment.
It could take up to 30 days for the changes to be reflected in the history. It’s essential to hold onto all documentation on interactions with the debt collector and repayment in case there are problems down the road.
When a debt goes into default and remains unpaid for several months with no contact between the client and the provider, the creditor has no other recourse but to send the debt to collections.
Debt collection is usually a last resort. Most lenders and credit issuers prefer to negotiate with their clients, but too often, the borrower fears the repercussions if they reach out.
Most loan providers and credit card issuers will negotiate with their customers with the mindset that receiving some sort of payment is better than not recovering anything toward the balance.
Once it does go into collections, it takes diligence to repay the debt and much effort to improve your financial health and credit profile, but it’s worth it. Taking steps to correct collections shows lenders admirable financial responsibility, which means you’re worth taking a risk.
That’s all a loan provider wants to see when assessing a client’s creditworthiness: someone who takes responsibility and will pay the debt back, a person taking the risk away from the lender.