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The Length of Time Before Unpaid Debts Fall Into Collections

February 29th, 2016 · No Comments

Regardless of the financial strain you may find yourself under, keeping your debts out of collections should be one of your highest priorities. Not only do collections severely damage your credit rating, but negative entries remain on your credit report for seven years–sometimes longer, depending on the debt. In extreme cases, creditors can file a lawsuit against you. Lawsuits carry severe consequences like wage garnishment, bank levies and, in some cases, property seizure. Fortunately, most forms of debt carry a grace period before sending accounts to collections. This gives you time to negotiate with your creditor in an effort to avoid collection costs and protect your credit rating.

Credit Card Companies

One of the most common debts consumers default on is credit card debt. Credit card companies would strongly prefer not to send your unpaid debt to a third-party collection agency. Because third-party collectors take a percentage of the amount they collect, credit card providers put extensive effort toward collecting defaulted debts on their own before turning to an outside agency for help. Major credit card providers generally wait 180 days from the date of your last payment to send your account to an outside collector.

Medical Debts

Unlike credit card companies, health care providers have few advanced resources for dealing with defaulted debts. They also have more difficulty in coercing debtors to pay, since medical debts aren’t something most individuals budget for. Because of this, health care providers often send medical debts to collection agencies after as little as 30 to 60 days without payment. Fortunately, health care providers are often easier to negotiate with than other types of creditors–allowing you to keep your medical debts out of collections even if you can’t pay the full amount right away.

Post-foreclosure Debt

If you’ve lost your home to foreclosure and the sale of your home doesn’t cover the remaining balance of your mortgage loan, you are still liable to your mortgage company for that amount. As a rule, mortgage companies don’t generally send post-foreclosure debts to collection agencies unless the amount you owe is relatively small. Lenders often wait–sometimes years–to give you time to get back on your feet financially before attempting to collect the unpaid balance via a lawsuit. Although this is financially devastating for most former homeowners, you can often prevent a lawsuit from occurring by contacting your mortgage lender and making payment arrangements on your remaining mortgage balance. Because lenders may wait years before filing suit against you, the grace period for negotiating and paying this form of debt is substantial.

Keeping Debts Out of Collections

When debts fall into the hands of a third-party collection agency, it’s usually game over for the debtor. Most collection agencies have a policy of immediately reporting new accounts to the credit bureaus. Once this occurs, depending on what scoring models your lenders use, paying off the debt may not improve your credit scores nor cause the account to be removed from your credit report (although paying the debt will protect you from the possibility of legal action later on). It’s critical that you address your unpaid debt problems with the original creditors before these accounts fall into the hands of collectors. It’s often possible to postpone payments or even pay a lesser amount until you get back on your feet financially. Remember, your creditors would far rather work with you than sell your debt to a collection agency for much less than it’s worth.

Tags: credit and debt

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