When you fail to pay a credit card or charge account debt, the debt triggers a series of events. First, you will receive mailed or e-mailed reminders. After 30 days, the company owning the debt will likely report the delinquency to one of the three credit reporting agencies. You will then likely receive delinquency notices and a series of phone calls and letters from a collection agency. The creditor eventually may write off the debt as a total loss, then sell it for a fraction of the debt to a company specializing in long-term bad debt collection.
Credit Rating Consequences
Your general payment history accounts for about 35 percent of you total credit score. If you have many other good credit relationships and one unpaid debt, the bad debt will lower the payment history part of your score but perhaps not significantly. You cannot know exactly, because the credit reporting agencies do not discuss details of their scoring practices. As the bad debt ages, its negative impact on your score decreases.
Debt Collection
At some point, the credit-issuing company will turn an aging bed debt over to a collection agency. How much energy the agency puts into the collection will likely depend upon the amount. For amounts greater than $1,500 but increasingly for lesser amounts since the 2008 credit meltdown, the agency will take you to court. Note that if you do not show up to defend yourself, the judge will likely issue a default judgment that you cannot appeal. Note that in some instances and in some states, you can be arrested for ignoring court orders related to debt repayment.
Long Term Debt Collectors
Most traditional collection agencies concern themselves with fast, if partial, payoffs of bad debt. An emerging kind of company, such as Encore Capital Group, buys aged credit and consumer loan debts for a few pennies on the dollar and then "pushes them through assembly-line litigation," to make a small profit, often with wage garnishment -- a legal way of attaching a portion of the debtor's pay check every pay period until full repayment of the debt is made. While these companies may return a small profit on each debt over an extended time period, they enjoy economies of scale and specialization.
Dealing with Debt Collectors
In cases where you cannot pay the debt or disclaim it, you may find yourself dealing with a debt collector. The federal Fair Debt Collection Practices Act gives you certain rights related to debt collection and obligates the debt collector to pursue the debt within the limits of the Act. You can read the Act online. Privacy Rights Clearinghouse maintains a helpful website informing you of details of the Act and giving various tips on working with debt collectors, filing disputes against them and suing them when you believe they have violated your rights.
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