When a debt collector removes an overcharge from an account, it is generally a good thing as it means you owe less money. However, the removal of the overcharge can have additional consequences, depending on the nature of the overcharge and the manner in which the collector removes it. The overcharge removal might have a positive or negative effect on your credit report depending on how the collector reports it.
Overcharge As Error
The best scenario for you as a debtor is if a debt collector removes an erroneous overcharge from your account. Typically, a debt collector buys your debt from your original creditor and has little if any knowledge about how you acquired your debt. Mistakes can be made in recording the correct amount of your balance when the debt amount from your original creditor is transferred to the debt collector. If you can document and validate the correct amount of your debt and present it to the debt collector, you may be able to have the overcharge removed without any penalty. The result is that you will owe less money than the debt collector originally reported to you.
Overcharge as Forgiveness
Debt forgiveness or cancellation is another way that a debt collector can remove an overcharge from your account, but the consequences of this action are less favorable to you as a debtor. According to the IRS, debt that is reduced due to forgiveness or cancellation is taxable income to you as a debtor. This scenario may arise if you negotiate down the amount of debt you owe the debt collector. Any amount by which the debt collector reduces your outstanding balance counts as taxable income to you, including the amount of any canceled overcharge.
Credit Reporting
One way or another, a debt collector will report the removal of any overcharge to the credit reporting agencies. If the overcharge is simply removed, the resulting drop in your outstanding credit balance may help improve your credit score. If the debt collector instead reports a cancellation of your overcharge, that may count as another negative mark on your credit report. Coupled with the problem of the taxation of forgiven debt, it is in your best interest to get the debt collector to simply remove the overcharge and report it correctly.
Bankruptcy
If a debt collector will not remove an overcharge from your account for any reason, you can effectively force its removal by filing bankruptcy. Although a drastic step, a successful bankruptcy can discharge your obligation to pay any of your debt, including any overcharges. Bankruptcy will damage your credit but will not require you to pay tax on the amount of the discharged debt.
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