Saturday, December 5, 2009

What Happens When Credit Card Companies Turn You Over to Collections?

What Happens When Credit Card Companies Turn You Over to Collections?

A credit card company might be patient with consumers who miss one payment, but after numerous missed payments and failed collection attempts, the credit card company will turn unpaid accounts over to collections. Professional debt collectors will then use a variety of tactics to secure payment for the defaulted credit card debt.

Facts

    Once a credit card company sends an account to collections, the credit card company no longer actively pursues the debt. That responsibility falls to the collection agency. Depending on the credit card provider, the debt can be either transferred or sold.

    When a creditor transfers a debt, it assigns the debt to a collection agency but maintains ownership of the debt. The debt collector keeps a percentage of any money it collects.

    However, if a credit card company sells the debt, it can claim it as a business loss on its taxes, and the collection agency retains any funds recovered.

Significance

    When a credit card company charges off a debt for non-payment, it reports the charge-off to credit bureaus. The late payments leading up to the charge-off, combined with the charge-off itself, can devastate the debtor's credit scores--causing a loss of 100 points or more.

    The collection agency that claims the debt is also likely to report it to the credit bureaus. Although a collection account is always a derogatory entry, collection accounts of under $100 have less of a negative impact on consumers' credit scores, according to a 2009 report by the Better Business Bureau.

Features

    As soon as a collection agency agrees to collect an unpaid credit card debt, it will contact the debtor seeking payment. Collection agencies often participate in collection tactics such as telephoning a debtor regularly and sending multiple written demands for payment.

    The Fair Debt Collection Practices Act regulates collection activity in the United States. A collection agency can telephone a debtor repeatedly as long as it does not do so with the intent of harassing her, according to the act. Debt collectors may also legally contact an individual's friends, family members and employer when attempting to find her.

Considerations

    The longer a person goes without paying a debt, the less likely a credit card company or collection agency is to procure a payment. Because of this, collection agencies often offer debt settlement plans. Through a debt settlement plan, the collection agency lowers the balance of the debt to make it easier for the debtor to repay. However, paying off the debt in this manner does not improve the person's credit score or remove the negative entry from the his credit report.

Warning

    If a collection agency's efforts to collect an unpaid credit card debt fail, it has the option to sue the debtor for the amount she owes. If the debtor loses the case, the court awards a judgment to the collection agency. The judgment appears on the debtor's credit report, doing further damage to her already suffering credit score.

    In addition, a court judgment gives collection agencies in some states the right to pursue a wage garnishment or bank account garnishment against the consumer and collect the debt by force.

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