- Debt collection myths can result in actions that do not help you get out of debt.
- Debt collectors often use fearto get more money out of you through manipulation.
- Avoidance behaviors often make things worse for you financially.
You never imagined you would fall behind on your bills.
After all, you are a responsible adult. You go to work, care for your family, and take responsibility for things when they go wrong. Yet here you are at the receiving end of debt collectionefforts,and you don’t know how to handle daily calls and threatening letters.
You need a crash course in the mysterious world of debt collections. What is the reality, and what are the myths that rapidly circulate the internet? And what do you need to know so you don’t make a bad situation worse?
Here are 5 myths that could cost you a lot of money if you don’t understand the myth versus reality.
Myth 1: Ignoring Collection Calls Will Make It Go Away
Lenders of unsecured debt have a limited number of ways to collect on an account. Missing a credit card payment or ignoring medical bills does not result in the loss of your home or car. It’s just phone calls and letters, and more phone calls and letters. It can appear that ignoring these collection attempts will have no consequences.
The truth is that collection companies have between three and ten years to sue on a delinquent account. Legal action often results in a default judgment, which gives the creditor the right to attach a garnishment to your wages, levy bank accounts, and put a lien on your property. The remedies available depend on your state of residence and the type of debt.
Myth 2: You Choose Whether to Pay the Original Creditor or the Debt Collection Agency
The debt collection process involves one of three parties:
- The original creditor, which is the company that lent you the money.
- Debt collection agencies that work for the original creditor.
- A debt buyer that purchases the debt from the original lender.
When dealing with the debt owner (original creditor or debt buyer), you directly pay the account owner. A debt collection agency collects debt on behalf of the account owner. The company receives a commission for all monies received and can only accept terms based on lender approval.
In any case, you must pay the company contacting you about the debt. Going around the debt collection agency does not impact the amount you must pay because the account owner always controls the negotiations.
If you are concerned about the legitimacy of a collection agency or debt buyer,request proof of the debt.
Myth 3: A Charge Off Cancels the Debt
A charge-off occurs when the original lender transfers the account from a receivable to bad debt. It is an accounting procedure that does not impact the company’s ability to collect or your obligation to pay the debt.
What it does do is stop the growth of the account balance. Once the account reaches charge-off, interest no longer accrues,and late charges end. The amount owed at charge-off will not increase until the company receives a judgment or sells the account to a debt buyer.
Myth 4: Paying a Delinquent Account Removes It from Your Credit Report
Credit reports document late payments for seven years. The account status does not affect the length of time the company can report the delinquency. Hiring a debt collection agency or selling the account does not change the start date of the delinquency.
At the same time, paying the account in full or settling the debt for less than you owe does not change the reporting timeframe. Even though the seven-year reporting period doesn’t change, the impact of the late payments diminishes over time.
Myth 5: Debt Collectors Demanding the Full Amount Won’t Negotiate
Debt collectors often imply that you must always pay the debt in full.
The truth is that nearly all creditors will negotiate lower payoff once you miss six or more payments. However, you must repay the balance in a lump sum or series of payments to receive the reduced payoff.
It’s also important to note that the first offer is not the only option. You can negotiate until you reach an agreement. The savings can be between 20 to 80% off the total amount owed.
Hiring a company to negotiate on your behalf can give you a distinct advantage and lead to a lower payoff. A debt settlement company can often extend the repayment to 12 months rather than the 1 to three months generally offered directly to consumers.
Should I ever pay a debt collector?
Ignoring debt collectors can lead to owing more. It can also lead to legal action, default judgments, and possible wage garnishments and account levies.
Can a debt collector lie?
Legitimate debt collectors will not lie to you about the debt. Doing so violates the FDCPA (the act protecting consumers from unfair debt collection practices). However, debt collectors are not required to volunteer information to help you make better decisions about when and how much to pay.
What happens if I never pay a debt?
Missing payments negatively affect your credit score. It could also lead tolegal action and eventual wage garnishments.