September 17, 2023 | Sammy Tran

Understanding Debt Collection

What is Debt Collection?

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Debt collection is the process undertaken by creditors or collection agencies to recover funds that are past due or accounts that are in default. 

This typically happens when a person fails to make required payments on debts, such as loans, credit cards, or medical bills.

How Does Debt Collection Work?

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Initial Default: When a debtor fails to make a payment by the due date, the account goes into default. Usually, creditors will try to contact the debtor directly during the first few months of non-payment.

Assignment to Collection Agency: If the creditor's attempts to collect the debt are unsuccessful, the account may be handed over or sold to a collection agency. This agency will then take on the responsibility of collecting the debt, using various methods from phone calls to emails, and in some cases, legal action.

Credit Report Impact: Having a debt sent to collections can significantly impact a person's credit score, making it harder to get approved for future loans or credit cards.

Why is Debt Collection Bad?

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Credit Score Damage: As mentioned, your credit score can take a severe hit, which can affect your borrowing capability for years.

Mental and Emotional Stress: Being contacted continuously by debt collectors can be harrowing and mentally draining.

Potential Legal Implications: If a debt remains unpaid, some collection agencies might decide to file a lawsuit. If they win the case, they might get a judgment that allows them to garnish wages or levy bank accounts.

Additional Costs: Sometimes, the amount owed can increase due to interest, fees, and other charges, making it even harder for the debtor to pay off the balance.

How Long Do Collections Stay on Your Credit Report?

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Collections can significantly impact your credit health. In the United States, most negative information, including collections, stays on your credit report for seven years from the date of the original delinquency that led to the account being sent to collections. 

This time frame applies to medical bills, credit card accounts, and many other types of debts. After the seven-year period expires, the collection account should automatically fall off your credit report.

It's worth noting that even if you pay the collection account before the seven years, it will still remain on your report for the full period, although it will be marked as "paid." However, some newer credit scoring models might not factor in paid collections, meaning that paying off a collections account could benefit your credit score under these models.

Also, remember that the statute of limitations for how long a creditor can sue you over a debt varies by state and type of debt and may differ from how long the debt stays on your credit report.

Avoiding the Pitfalls of Debt Collection

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Stay Proactive: If you realize that you might not be able to make a payment, contact your creditor immediately. They might offer a payment plan or a temporary reduction in payment amount.

Know Your Rights: Familiarize yourself with the Fair Debt Collection Practices Act, which provides specific guidelines about when and how a debt collector can contact you.

Validate the Debt: If a collection agency contacts you, ensure that you validate the debt. They are legally required to provide proof that you owe the amount claimed.

Seek Financial Counseling: Consider consulting a financial advisor or credit counselor. They can offer strategies for managing and repaying your debt.

A Concerning Statistic About Americans and Debt Collection

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A study from the Consumer Financial Protection Bureau (CFPB) revealed that about one in three Americans have been contacted by a creditor or a collection agency in the past year. 

This alarming statistic underscores the importance of financial literacy and proactive debt management.

While debt collection is a legitimate business process, it's essential to be informed and prepared to manage one's finances to avoid the distress and complications that can come from having debts sent to collections.



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