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What to Expect When You Have Debt in Collections

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When a debt goes unpaid, creditors often pass it off to a collection agency that will contact you in various ways in order to get you to pay up. Meanwhile, your credit score will take a significant hit when you default, limiting your access to new credit. Here is a closer look at what you can expect when a bill lands in collection, as well as how to dispute collections for money you don’t owe and how to work with an agency to eliminate the debt.

What is a debt collection agency?

A debt collection agency is a company that collects past-due funds from borrowers on behalf of creditors. Some creditors use an internal collections department or subsidiary, while others will send your account along to an outside agency if your bill is in default, or considerably overdue.

Once a bill is sent to collections, the collection agency will contact you for payment and you’ll no longer hear from your creditor or be able to pay them directly. The agency will then work to recover unpaid funds in exchange for a portion of your payment.

It’s likely your bill won’t suddenly end up in collections. Instead, you’ll hear from your creditor multiple times and over three or four months before your account is finally turned over to collections. However, it’s also possible for a debt to be sent to collections without notice because creditors are not required to inform you. This is sometimes a complaint with medical bills.

What to do if a debt collector contacts you …

  • Don’t share personal information until you’re sure you owe money.
  • Ask for identifying information, like the collector’s name and address, as well as the amount of the debt. Verify both are legitimate to avoid a debt collection scam.
  • Determine how old the debt is, such as by asking when the last payment was made. If the debt is beyond the statute of limitations, it is considered time-barred, which means you can’t be sued for it.
  • If you don’t believe you owe the debt, dispute it in writing within 30 days.
  • If the debt is yours, negotiate a payment plan or lump-sum payment for all or a portion of the debt. Get the agreement in writing.

What it means when your debt is in collections

Your debt goes to collections after your creditor has repeatedly failed to get you to make payments. The agency will then step up efforts to contact you, and you’ll start receiving calls and letters, sometimes persistently.

Here’s a timeline of what to expect when you’re late paying bills:

What happens when you’re late on payments
Days your payment is overdueWhat happens
0-30Your creditor will likely contact you to let you know your payment is past due. You may also be charged a late payment fee.
31-60Your creditor will report your missed payment to the major credit bureaus, possibly causing your credit score to drop 90 to 110 points.
61-90After two missed payments, you’ll likely be charged a penalty APR on credit card debt.
91-120Your creditor may enlist the help of a debt collection agency and also report a default on your account. This can drop your score another 50 points.
120+By now, your debt will likely be in collections. The debt collection agency may threaten to garnish your wages or take you to court, depending on the laws in your state.

Letting a debt go into collections can have a devastating effect on your credit score. However, the drop will also depend on how much other negative information is in your credit history. If you have excellent credit, you might see your score drop to as much as 150 points. If your score is already low, you’ll likely see less of a drop.

Like most negative credit information, collection accounts can stay on your credit report for up to seven years. However, paying off a debt in collections won’t necessarily improve your score. That’s because some lenders — like mortgage lenders — still use older scoring models when assessing your eligibility for credit. Unlike newer scoring methods, older methods keep a record of negative collection information even if the debt has already been paid off.

Your rights during the collections process

You have certain rights when it comes to how debt collectors can behave. For example, by federal law, collectors are required to send you a debt validation letter within five days of contacting you. The letter needs to detail the amount owed, the name of the creditor and how to dispute the debt. If you receive a letter like this — and don’t think the debt is legitimate — you have 30 days to challenge it in writing.

As you’ll see below, federal law also gives you the right to request in writing that a debt collector stop contacting you. A collector is exempt from this requirement only if they need to inform you of an impending lawsuit or if they’re stopping efforts to collect your debt.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is designed to protect consumers from unfair and deceptive practices by debt collectors. It covers most debts, other than business debts, and sets forth rules for how and when a debt collector can contact you.

Under the FDCPA, debt collectors cannot …

  • Contact you between the hours of 9 p.m. and 8 a.m.
  • Contact you at a location you’ve indicated is inconvenient, like your workplace
  • Harass you with threats of violence, obscene language or excessive contact
  • Falsely threaten arrest, legal action or repossession of an asset like a car or home
  • Claim to be an attorney or government representative
  • Lie about your debt or how much you owe
  • Add interest charges or fees not allowed in your state or specified in the contract with your creditor
  • Garnish wages without a court order
  • Sue you for time-barred debt that has passed the statute of limitations in your state
  • Inform others about your debt unless it’s your spouse, guardian or attorney

If a debt collector violates any of these rules or any laws that apply to debt collection in your state, report their behavior to the following …

Under the FDCPA, you also have the right to sue a debt collector in court as long as it’s within a year after the violation. If you win, you might be compensated for any distress you experienced, as well as any wages you might have lost. Keep in mind, however, that suing a debt collector for illegal behavior doesn’t necessarily erase any debt you might have owed.

How to dispute debt in collections

If you have been contacted about a debt that you do not believe is yours, follow these three steps:

  1. Send a written dispute letter. Do this within 30 days after a collector first contacted you. In your letter, ask the agency to stop contacting you unless it can provide proof that the debt is legitimate. You can use this sample dispute letter from the CFPB.
  2. Keep a copy for your records. Always keep a copy of your dispute letter in case you need to go to court.
  3. Wait for verification. By law, your debt collector needs to stop contacting you until it verifies the debt in writing. At the very least, the verification you receive should list the amount and date of the debt you owe, along with the creditor’s contact information.

How to pay a collection agency

Pay in full

The most straightforward way to handle a debt in collections is to simply pay what you owe. You won’t need to negotiate, and it might improve your credit faster than some of the options described below.

Coming up with a lump sum might prove difficult, however. If that’s the case, you may need to:

  • Ask a friend or family member for financial help: To keep your relationship intact, draw up a repayment plan.
  • Tap your savings or retirement account: Consider these options only if you think you can rebuild the account once the debt is paid off. If you’re behind on debt that is not in collections, you may want to prioritize it in order to avoid further damage to your credit.
  • Use a debt consolidation loan: This type of personal loan lets you pay multiple bills with a single monthly payment at a fixed rate and over a fixed term. If you have weak credit and cannot qualify for a traditional debt consolidation loan, consider a secured loan, which is backed by an asset you own, like your car.
  • Consult a nonprofit credit counseling agency: An agency can help set up a debt management plan, which might let you pay off your debt over time. If interest or fees have piled up on your debt, a counselor may also be able to negotiate a lower rate or help waive fees.

Once you’ve paid off your debt to a collection agency, you can expect the agency to stop calling you. You can also expect an amendment to your credit report to show the collection account was paid in full. Check your credit report to make sure your information was updated.

Negotiate a payment plan

It’s likely your debt collector may offer you a payment plan that lets you pay off your balance with fixed payments over a fixed period of time. If this option might work for you, get an agreement in writing, and make sure your account will be reported as “paid in full” once your last payment is in.

if your debt is old, be cautious with a payment plan. Time-barred debt means you are no longer legally obligated to pay it because it is past the statute of limitations in your state. However, making even a single payment might reset the clock and allow a debt collector to take you to court for the full amount you owe.

Settle the debt for less

If you’re short on cash and don’t qualify for a loan, a debt settlement will let you repay the owed debt for less than the total amount. Debt settlement can be harmful to your credit, however, so ask the debt collector to have any negative information related to the debt removed from your credit files as part of a debt settlement agreement.

What happens if you ignore the debt?

If you ignore a debt in collections, a debt collection agency will continue to contact you, and your failure to respond may cause their actions to escalate. With time, a collection agency might threaten to have your wages garnished or take you to court. With a court order, a collection agency might also be able to take money directly from your paycheck or bank account.

That’s not the case with time-barred debts. For this reason, if your debt is old enough and cash is tight, it might make sense to wait until you are no longer legally liable for it. The caveat: If your debt were to get sold again — possibly to another collection agency — a new collection account might appear on your credit report.

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Consumer Watchdog, Pay Down My Debt

5 Steps to Take When Your Car is Repossessed

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For the most part, you will know ahead of time when a car repossession is on the horizon. But, even when you have an inkling your car is about to get taken away, walking outside to find it missing is upsetting.

A car repo can jeopardize your mobility long-term. And if you don’t have access to public transportation or a friend to give you a lift, having no car to get to and from work could mean you’ll lose your job, which triggers other financial issues. If your car has been repossessed (or it’s a possibility it will happen soon) here’s what you need to know and the options for getting it back.

Step 1: Take a Record of Any Property Damage

There are laws in place to protect you when a repo company comes for the car. They can’t disturb the peace, use excessive force, damage your property or cause you harm in the process.

If you believe the repossession happened aggressively, you may have a case for reimbursement of damage or the return of your car. The repo agency may also get hit with a penalty for their actions. Take photos of the damage as a backup and get a second opinion from an attorney.

You should also have a record of what the car looks like and any damages before it’s repossessed. Otherwise, could turn into a bit of a “he said, she said” debate.

Step 2: Find Out Why Your Car Was Taken

Technically, a car isn’t “yours” until you pay off the car note. If you default, in most states the company financing your car has the right to take it back without warning you. The same applies if you’re leasing a car. Miss a few payments and the lessor can take back the property.

When a repo occurs, contact the creditor as soon as possible. Unlike when a contractor tows your car for minor offenses like unpaid parking tickets, after a repo, your car doesn’t wait patiently on a lot until you bring your bills current. The car can be sold to recover the financial loss.

Fortunately, many states require that you’re notified of the pending auction or sale of your vehicle beforehand, so you have a reasonable time to act. Ahead of the sale, you may be able to reinstate the auto loan, pay off the loan entirely or buy the car back. We’ll talk about each option for reclaiming your car in the next section.

Besides defaulting on a loan, in some states, your car may be repossessed when your insurance lapses. If you’ve stopped paying your car insurance, find out from your creditor or DMV if that’s the reason your car is missing and ask what the penalties are for not keeping insurance.

Step 3: Explore Options to Reclaim the Car

The rules for getting your car back when your payments are in default vary by state and contract, but according to the Federal Trade Commission, there are generally three options to discuss:

Reinstate Your Auto Loan: This will probably be the most affordable and less cumbersome option if it’s available to you. Reinstating the loan is when you pay the amount you’re behind plus all of the fees associated with the repossession including towing and storage to get it back.

Redeem Your Car: Redeeming the car means paying off the entire balance of the loan to get your car back. Going this route may not be feasible or smart if your car is worth less than you owe. Besides the entire loan amount, you’re also on the hook for the repossession fees.

Buy Your Car Back: Again, this option may not be possible if you’re having a hard time just making car payments. When you get the date and time of the auction your car will be in, you can attend and try to buy it back.

Step 4: Decide if You Can Afford to Get the Car Back

After going through each of your options, you may find you’re not financially stable enough to retrieve your car. Even in the best case scenario of reinstating your loan, you’ll need to have the means to make regular payments and maintain the car. If you can’t handle it, you may have to let the car go. There are some financial implications when giving up on the car as well.

When a creditor sells your car, it has to make a reasonable effort to get a fair market price for it. If the fair market price is less than how much you owe, you can be sued for deficiency; the difference between how much you owe and how much the car sells for.

Fortunately, if the car sells for more than what you owe, you also get to pocket the difference. You should get a notification of whatever you owe or if money is owed to you. Follow up on the resale yourself if you don’t. Unpaid deficiency can end up in collections.

Lastly, if you plan to wash your hands of the car loan, you could be in a deep financial hole all the way around and in the process of filing bankruptcy. If so, you may be able to include the car in the agreement and get it back. In this case, contact the attorney handling your bankruptcy right away.

Step 5: Get Your Belongings

Regardless of how you intend to resolve the repossession, you’re entitled to all of your belongings in the car. Whoever has your car should make a reasonable effort to protect your belongings from damage and theft. It’s a good practice to not leave any valuables in the car if you’re on the verge of repossession to avoid theft or damage.

Often, you’ll be contacted with the location where you can pick your stuff up. If you find anything missing or damaged, take notes. You may be able to reduce your deficiency bill with proof that you experienced property loss.

Final Word: Act early

If you know making future car payments is going to be a struggle, you’ll benefit the most from acting early to avoid the costs of repossession. Here are a few steps you may be able to take:

  • Negotiate: If you’re going through a temporary hardship, you may be able to work out a short-term deal of reduced or excused late auto payments. You won’t know unless you ask. Be sure to get any form of agreement in writing.
  • Sell your car: Selling a car with a lien can be difficult, but not impossible. Once sold use public transportation or a carpool for the time being.
  • Refinance the loan: You may be able to refinance to a lesser monthly payment before things go south. Keep in mind, refinancing may come with processing fees and other costs, so you need to factor them into the equation.
  • Surrender the car yourself: If you’re already in default and know the repossession is coming, you can give up the car on your own terms. No dramatic car tow scene necessary and you can clear the car of your belongings. Then if you decide to redeem your car or reinstate the loan, you won’t have to pay some of the repossession fees.

Having your car repossessed is scary, but even when you hit rock bottom, there are solutions. If you put aside the emotions and think logically, you can recover. Your best move is to prevent it and keep the lines of communication open with the company servicing your auto loan.
If it’s too late for that, your main choices (depending on your contract and state) are to bring the loan back current and fork up repossession costs, pay-off the loan, buy the car back or give up the car entirely.

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Should You Shop with Fingerhut? (Probably Not)

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Should You Shop with Fingerhut

Plenty of consumers today either make a proactive choice to ditch credit cards or are unable to gain access to one due to a low credit score or non-existent credit history. In response, payment processors like PayPal offer a credit service where shoppers can finance purchases with online retailers – but more and more independent businesses are following the trend and offering their own lines of credit for online shopping portals.

Fingerhut is one such website. Fingerhut acts as a catalog that focuses on being able to finance your purchases. The site allows you to purchase and receive items now, and then make monthly payments on what you ordered to pay for them in full over time.

But is it really shopping on credit now and paying later?

How Fingerhut Works

Fingerhut

Fingerhut is an online shopping portal that sells “everything from furniture and bedding to jewelry to the latest electronics.” All purchases are made on a line of credit extended by the company and customers must repay their balances with monthly payments.

You’ll receive an answer immediately when you apply for credit, and some customers are able to start shopping instantly. Purchases that aren’t paid off in full after buying accrue interest, with an APR of 25.15%. There are no annual fees.

Fingerhut offers two programs for customers to receive credit: the Fingerhut Advantage Revolving Credit Account and the Fingerhut FreshStart Credit Account.

The Revolving Credit Account “may or may not require a one-time down payment when you place your first order.” The company states that this isn’t a fee, but a charge that will be applied to your order.

In comparison, the Fingerhut FreshStart® Credit Account is backed by WebBank and acts as an installment credit program. You’re required to make a $30 down payment on what you want to order. If you make payments on time and in full, Fingerhut promises to change your account to the Revolving Credit Account (and up your credit limit).

You cannot transfer balances or take cash advances from either credit option, and your credit can only be used with Fingerhut.

Screen Shot 2016-02-11 at 11.42.48 AM

Who is Being Targeted?

Fingerhut doesn’t require membership, but you do have to apply for their lines of credit before you can shop with them.

The site targets people with no or poor credit who may be declined for lines of credit with other retailers. If you’ve been declined for a store card at your local department store, for example, Fingerhut’s offer may look particularly attractive: you get to finance your purchases even with poor credit.

The main reason people shop with Fingerhut is because the company offers popular, name-brand products and allows you to finance them instead of having to purchase what you’re looking for outright. The site is legitimate from that standpoint – you can charge items to your credit account, they’ll ship after you make a down payment, and then you can repay the balance monthly.

But consumers need to beware before signing up, applying for credit, and heading to the checkout page.

Buyers Need to Beware

Prices of items listed on Fingerhut are considerably higher than other retailers, and there’s little benefit to buying items on the line of credit they offer. Those with bad credit scores won’t see much improvement to that score by using the site, and there’s no reason to attempt to boost your credit score by purchasing material goods from an online retailer.

If consumers need to purchase on credit, they’re often better off charging something to a credit card (or saving up cash to buy what they want). Fingerhut’s prices for the items themselves are higher than in other stores, and their interest rates are often even higher than the rates on credit cards.

And customers aren’t building credit with any company beyond Fingerhut. The site claims that they “can help shoppers build buying power with us,” which is not the same as building credit history. Instead, try building credit history with a secured card.

Choose More Sensible Shopping Alternatives

Fingerhut’s online catalog features a huge variety of items that you can order now and pay for later. But by the time you’ve paid off your purchase, there will be much more cash out of your pocket than necessary. Through Fingerhut, you’ll pay more for your item itself than you would if you purchased at another store – and you’ll pay interest on top of that, too.

If you don’t have the cash in hand today, take a step back and look at your budget to understand why. Are you overspending? Do you really need the item you’re trying to buy, or is an impulse purchase? Is there something else you’d rather do with your hard-earned money than spend on material goods, like saving up for a goal or investing for your future?

If you decide you do want to buy items like the ones you can find on Fingerhut, it still makes sense to choose other alternatives for your shopping needs. In the long run, it’s much cheaper to buy what you’re looking for through other retailers. You can still shop online and get better deals on overall price.

Use coupon sites to look for codes and discounts, and check out online shopping portals like Amazon and eBay to hunt for the best deals. Set up price alerts to be notified when things go on sale and plan purchases carefully to make the most of the money you want to spend.