An original creditor, such as a bank or credit card company, can sell or assign a delinquent account to a collection agency -- even if the consumer disputes the accuracy of the account. However, there are provisions under federal law to challenge the account once a debt collector begins the collection process.
Timeline
Original creditors usually close accounts after they fall six months behind, although some lenders may take the action sooner. Creditors list a closed account as a "charge-off," which is a very negative credit event usually leading to placement of the account with a debt collector.
Disputes
Creditors are usually very responsive to customer complaints, or disputes, while the account is active. Legitimate disputes such as complaints about accounting errors are usually addressed in a timely way. However, it is not possible to use a dispute to stop making payments on a legitimate account and block the creditor from placing the account with a debt collector. It is best to resolve disputes with the original creditor while the account is still active. Debtors should continue to make payments as agreed while the creditor responds.
Effects
Accounts placed with a debt collector result in increased collection efforts, including telephone calls and notices by mail. The action also hurts credit scores, with the notations "charge off" and "collection account" listed on the debtor's credit reports. It is impossible for anyone to predict just how much a debtor's credit score will fall after a charge off or collection. That's because everyone's credit is different, and people with bad credit usually experience lower drops in credit score than people with good credit. Credit scores are three-digit numbers ranging from 350 to 850, with scores of 720 or higher considered ideal.
Validation
The Fair Debt Collection Practices Act, a federal law, allows debtors to dispute debts after placement of a debt with a debt collector. Privacy Rights Clearinghouse, a national nonprofit consumer information company, reports that debt collectors must provide debtors a written notice about the debt, including the name of the original creditor and the amount due. After receiving the letter the debtor can dispute the debt in writing. Under the terms of the Fair Debt Collection Practices Act the debtor must write the letter to the debt collector. The debtor can demand proof of the debt, such as billing statements. By law, the debt collector must end all debt collection efforts until it sends the proof to the debtor.
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