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Helping a Viewer Get Her Financial Life Back

Friday, 12 Sep 2008 | 4:05 PM ET

Gerri Detweiler has been helping consumers find answers to their credit questions for more than twenty years. She serves as Credit Advisor for Credit.com, and her newest book is Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts.

Dealing with Debt Collectors

Recently I had the opportunity to join Carmen as she helped Brandi create a plan to get her financial life back on track. Brandi is a college financial aid officer who said that she tries to help students avoid the same mistakes she’s made. She is juggling student debt, collection accounts for unpaid credit card debts, and she’s the mother of a young child. Plus she’s planning on going back to school to get her Master’s degree!

Brandi is concerned about numerous old, unpaid collection accounts listed on her credit report. She told Carmen she wants to clean up her credit and resolve these debts.

When I reviewed Brandi’s credit reports from all three major credit reporting agencies I found two problems:

1. Numerous discrepancies between the way collection accounts were listed on her credit reports, and

2. Many of those collection accounts did not list the original date of delinquency, which is required by law, and essential to her strategy (more in a moment).

Brandi has a little money in savings and is thinking about settling these accounts, but before she does, I want her to understand a few things about how collection accounts work.

Paying Old Collection Accounts

In every state, there are laws covering the “statute of limitations” for different types of debts. If a creditor (or collection agency) sues you after the statute of limitations has expired, you can raise the statute of limitations as a defense and the person suing you will lose the case. Some debt collectors don’t pay attention to the statute of limitations, though, and try to collect anyway. In some states, if you make a payment – even a small, token payment to get the collector off your back – the statute of limitations can start all over again.

Brandi needs to understand the statute of limitations in her state, New Jersey, is six years. So unless she has made a payment or promised to pay on those old debts in the past six years, they are too old to be collected.

I want to point out that I am not trying to help Brandi wiggle out of her debts. But she has a limited amount of money to work with right now, and if she starts paying all those old debts, she is going to open a can of worms. I’d like to see her become financially stable before she starts trying to resolve the older items.

Credit Reports and Collection Accounts

Some of Brandi’s debts are old, but not old enough to be outside the statute of limitations. For those debts, Brandi can negotiate to settle them for less than the full amount. I’d like to see her aim for settlements of around 25% of the total amount due. Again, I’m not trying to get her off the hook her, but she only has so much to work with and if she doesn’t keep a small stash of emergency cash, she’s going to end up back where she started. She needs to use the money she has very carefully.

Credit Reports and Collection Accounts

One of Brandi’s goals is to clean up her credit so she can buy a house. I have good news and bad news for her. The bad news is that paying off those old accounts won’t help her credit rating one iota. The negative listings will still remain for as long as they can legally be reported, and will continue to affect her credit, paid or unpaid.

But here’s the good news: Collection accounts cannot be reported for more than seven and a half years from the date you first fell behind with the original creditor. That’s true whether they are paid or unpaid. (New York residents see that information drop off their reports after five years.)

Because many of the collection accounts reported on Brandi’s credit reports don’t list the original date of delinquency (when she first fell behind), she needs to clarify that date for each account, to make sure old accounts aren’t reported longer than they should be. That may mean disputing those items with the credit reporting agencies. If the accounts are too old – or are not verified by the collection agencies – they will be removed from her reports.

One last piece of advice for Brandi: I notice she has no current, active credit card references on her credit report. I recommend she goes to Credit.com to find a secured credit card. A good credit score requires recent positive information, and Brandi needs to start establishing that. She can put a few hundred dollars of the money she has saved into an FDIC insured account with the secured card issuer, and use that card for purchases she would make anyway – such as groceries and gasoline. I would encourage Brandi to use her new card sparingly (but do use it, so it remains active) and pay the bill off in full each month to avoid interest charges.

I am sending Brandi a copy of my new book, Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debt (Credit.com 2008) so she’ll have detailed information on how to resolve these collection accounts and get on with her financial life!