Should you pay a collection account? Great question! Before we get to your question, let’s define some words and phrases collection agents use, and talk about three issues you need to think about before taking any action.
If you have an unpaid debt, you may wish it just goes away. But original creditors and collection agents see unpaid debts as assets. Like almost any other asset, an unpaid debt can be bought, sold, or traded. Debt collectors and original creditors call bad debts “collection accounts.”
Your collection account can appear more than once on your credit report. Its history will start with the original creditor, and then reappear on your credit report as collection agents buy, sell, and trade your account. Your collection accounts may move through many collection agencies, and your credit report will show this chain of ownership.
What’s a Derogatory?
The credit bureaus — Equifax, Experian, and TransUnion — call collection accounts “derogatories.” Derogatories are negative accounts that drag down your credit score. Most collection accounts and other derogatories are allowed to appear on your credit report for 7 years. The starting point for the 7-year rule is the date of first delinquency. In other words, the 7-year clock starts when you miss your first payment.
Dishonest collection agents change the date of first delinquency to a later date. This violates federal law. They do this, it seems, to make a collection account appear longer on your credit report, thinking its lengthy appearance will add pressure for you to pay the debt.
Pay or Ignore a Collection Account?
You may wonder if it is worth your while to pay a collection account. Let’s look at this question from three different angles:
- Your state’s statute of limitations
- The credit report 7-year rule
- A collection account’s impact on your credit score
Let’s get some misinformation out of the way first. You may read statements from some who say, “You don’t have a legal obligation to pay a collection agent anything because you never had a contract with the collection agent.” This argument doesn’t hold water. Original creditors reserve the right to sell their collection accounts. This gives the collection agent who buys your collection account the legal right to collect the face value of the debt. You may have some other reason you do not need to pay an old collection account, but it won’t be due to this bogus argument.
1) Statute of Limitations
A statute of limitation is a time limit. Once the statute of limitations clock runs out on a crime, for example, the district attorney can no longer charge anyone with the crime. Statutes of limitations for debt are a bit different and more complicated.
For debt, the statute of limitations is a civil matter. Being in debt is not a crime. When someone files a civil lawsuit against you, always look at the statute of limitations. If the statute of limitations clock has run out, then you can file a motion with the court that says, “Hey, everything here might be true, but because the clock has run out, the court must dismiss the case.”
Every state’s statute of limitations rules vary. Learn your state's statute of limitations rules for the type of debt in your collection account. If your state’s statute of limitations clock on your collection account has run out or is about to run out, you can use this to your advantage. More about this later.
If your collection account’s statute of limitations clock has expired, you have no legal obligation to pay the debt. If your collection account’s statute of limitations clock as run out, a collection agent cannot use a lawsuit threat to try to convince you it’s serious about collecting the debt. Any threat of this kind is not only hollow, it is also illegal.
Two confusing things about statutes of limitation and collection accounts trip-up many people:
- An expired statute of limitations clock does not prevent lawsuits. Some original creditors and collection agents file lawsuits against consumers even though the statute of limitations clock has expired. This is legal in all but two states. You may wonder why someone would file a lawsuit they know could be defeated so easily. Many consumers do not understand statutes of limitations laws, or bother to hire lawyers to defend them. This is unfortunate, but consumers who do not defend themselves lose by default. Consult with a lawyer if you receive a written notice of a lawsuit.
- The statute of limitations clock is separate from the 7-year credit report clock. Some state statutes of limitations are shorter than 7 years, but some are longer. Keep these two clocks separate in your mind because they are for separate things.
2) The Credit Report 7-Year Rule
As mentioned above, most collection accounts can appear on your credit report for 7 years. Collection agents cannot change the date of first delinquency to make the collection account appear for more than 7 years.
Dishonest collection agents will claim that as long as the collection account appears on your credit report, you have a legal obligation to pay the debt. That’s not true.
If the 7-year clock on your collection account is about to run out, you can use this to your advantage. More about this later.
3) Credit Scores & Collection Accounts
A collection account harms your credit score as long as it appears on your credit report. However, credit score software like FICO and VantageScore put less and less weight on a derogatory the longer it appears on your credit report. A fresh collection account harms your credit score more than one that is 6 years old.
Generally, credit scoring software does not reward or punish you for paying off an old collection account. Your credit score is damaged when a creditor reports negative things about you to Equifax, Experian, and TransUnion. The most damaging are missing payments and allowing your account to become so delinquent it becomes a collection account. Unfortunately, paying-off a collection account usually does not reverse the damage caused by your missed payments.
Should I Pay or Ignore My Collection Account?
If a collection agent is pressuring you into paying a collection account, follow these four steps.
|Two Collection Account Examples|
|A collection agent contacts…|
|Facts||…Sharon about a $650 debt she stopped paying 5 years ago||…Tom about a $2,000 debt he stopped paying 2 years ago|
|Statute of Limitations||4 years in Sharon’s state||6 years in Tom’s state|
|Pay the debt?||No legal obligation to pay because the SOL clock expired 1 year ago||Tom may be obligated to pay the debt. He should validate the debt, and proceed accordingly.|
- Validate the debt to make sure you really owe the debt. Just because a collection agent claims you owe a debt does not mean you do. Follow the directions on the page just mentioned to learn the steps to validate a debt properly. If the collection agent cannot validate the debt, it may not collect it.
- Learn your state’s statute of limitations to see if you have a legal obligation to pay the debt.
- If the time from your last payment on the debt to the present is longer than your statute of limitations, then you have a defense you can use if the original creditor or the collection agent file a lawsuit against you. In other words, you have no legal obligation to pay the debt.
- If the time from your last payment to the present is less than your state’s statute of limitations, then you cannot use the statute of limitations as a defense. In other words, you may have a legal obligation to pay the debt.
If the debt has not reached the end of your state’s statute of limitations, then consider negotiating a settlement to the debt.
When it comes to lawsuits, creditors are unpredictable. Some will file a small claims lawsuit for debts less than $500. It would be logical to assume creditors sue only people who have the ability to pay a judgment. However, Bills.com readers have reported creditors suing people with no income or assets.
Pay Debt to Improve a Credit Score?
If you see a collection account or two dragging your score down and you want to improve your score, then your options are limited.
As mentioned, FICO will not increase your credit score when you pay-off a collection account. Because almost all mortgage lenders and many auto finance companies use FICO, paying-off a collection account will not increase the score lenders see.
Is it wasteful to pay-off a collection account? No, for three reasons:
- Your creditworthiness is more than a number. Lenders look at more than just your FICO score when determining your creditworthiness. Many lenders view paying off old debt as a sign of goodwill and trustworthiness. The lender looks beyond your score to see patterns of payments and commitment to financial obligations. A prospective lender likes to see a person who pays their debts, even if it notices a few bumps along the way.
- Your amount of debt matters. Lenders look at your debt-to-income (DTI) ratio as an important measure of your ability to repay a loan. Paying-off an old collection account will improve your DTI ratio and may make you a more attractive loan candidate.
- You avoid a lawsuit when you settle. If the statute of limitations has not run out on your collection account, the creditor can file a lawsuit against you. If it wins, the court will award it a judgment. The judgment will harm your credit score. The judgment creditor can use the judgment to garnish your wages, levy your bank accounts, place a lien on your property, and ask the sheriff to seize your personal property.
Visit the Bills.com credit resource page to learn more about credit scores and credit issues.
I hope this information helps you Find. Learn & Save.