What is a collection account? In this episode, Merrill Chandler takes us to a deep dive into what’s the life story of a collection? What is its impact on our fundability, our profiles, and collection accounts? How do they become a thing? How can we help them go away or cause bureaus to do so after we audited our profiles? Listen intently as Merrill gives everything you need to know about collection accounts, its two kinds, and some myths that need to be busted out there.
Watch the episode here:
Listen to the podcast here:
Life And Times Of A Collection Account
In this episode, we’re going to be doing a deep dive into what’s the life story of a collection? What is its impact on our fundability, our profiles and collection accounts? How did they become a thing? How can we help them go away after we audited our profiles? How can we cause the bureaus to possibly remove that? Everything you need to know about collection accounts and the truth. We’re going to bust a few myths out there. That’s what’s happening in this episode. I pulled out one of the training videos that I did for my team, my clients and students. I want to share it with you because when I went through it, I was like, “I can’t say any better than this.” We’ll go straight into what I believe is the final word in collections accounts and their impact on your fundability.
Let’s talk about how collection accounts work. There are two types of collection agencies. This is vital because if you don’t know who you’re dealing with, you aren’t going to know how to act with them. There can be a collection agency. There can be an attorney who is doing the collecting or there’s a hybrid. This is the most common where there are collection agencies with in-house attorneys. Number three is the most popular. When it comes to how a collection agency acquires the debt, there are a couple of popular ways. The collection agency has a relationship with a creditor. They’re a single source for the creditor to pay a fee, usually a percentage of the collected funds.
There are captured collection agency or a captured attorney. American Express in a particular region has 1 or 2 captured collection agencies and they give all the business. There’s an API. There’s an automatic data processing between their accounts. When they send it to collections, they are dropping it on the electronic desktop of one of these collection agencies for them to pick up and they keep a percentage of the collected funds. That’s the first type. Both of these types are about the same frequency or popularity. They’re ubiquitous out there in the marketplace. There is a direct relationship with a creditor that keeps a percentage of the collected funds.
The other one is the collection agency purchases a block of debt. This block of debt, they buy at a discount, usually 5% to 10% of the face value. Once a creditor has gone through 3 to 6 months of collection attempts and trying to get the borrower to pay, they sell it off and make money. An account cannot be charged off and collected internally because you can’t say that you lost money and then try and make it. What they can do is sell that note, sell that debt to a collection agency, and that becomes a new revenue item and then they write-off the difference. If they sold $50,000 credit card debt for $5,000, they only get to write-off $45,000. They do receive revenue of $5,000 for that debt. Usually, it’s 5% to 10% of the face value. That’s how they acquire the debt.
Let’s talk about how they collect the debt. For those people who don’t know what they’re doing, some people say, “It’s a $200 debt or your medical bill or whatever.” People say, it’s $200 and then they pay face value. The next one is a payment agreement. They’re less likely to settle with payment agreement because you either get to pay it over time or you get to pay less but all at once. If you’re good, be sure to tell your credit advisors if you’ve been able to do this because I want to know your secret sauce, but you rarely get to say $5,000 and then they pay $500 a month for ten months.There is a direct relationship with a creditor that keeps a percentage of the collected funds. Click To Tweet
Payment agreements are popular, but you’re usually paying the face value. The next one is that one-time settlement. They’re buying it at 5% to 10%. If they settle it at 20% to 80%, they’re doubling or five times their ROI. It can be 5 to 8 times what they bought it for. When they wrangle you hardcore for 20% or 30% of the face value settlement, remember they bought it for 5% to 10%. A $10,000 note, they probably bought for $500, maybe $1,000. If you offer them 20% thinking you’re getting a good deal, which you are, but they’re doubling their money. Remember that in your negotiations. All of these things are going to be on your personal optimization plan. They’re going to be parsed out next to your trade lines or collections and the public records sections of your plan so that you can use this as a guide. They’re doubling their money and that is part of your negotiations.
Part of the collection of the debt, they may threaten if you don’t pay the face value, they may say, “I’m going to 1099 you for whatever you don’t buy.” We go to that $10,000 debt. You offer $2,000 and they’re like, “I’ll take $2,000 but I’m going to 1099 you for the other $8,000.” That’s $8,000 more on your income in your taxes. If you’re at 20% to 30% taxes, then that $8,000 you’re going to be paying another $1,500 and $2,000 in taxes. They may threaten you if you’re not paying face value about that 1099. I’m going to tell you a secret. Creditors and lenders will send you 1099, but it is not popular for even the biggest of the collection agencies to send 1099. Most of the time, it’s an empty threat because they do not send out 1099. Remember that in your negotiations.
We’ve talked about how they collect, but let’s talk about the rules of how they would pay the debt or how you would pay the debt. The older the debt, the lower your settlement can be. Think of it in years in the neighborhood of 10% to 15%. If it’s less than a year old, they’re going to probably go down to maybe 80%. Depending on the circumstances and the amount, they may go 60% to 50%, but I’m telling you in the guidelines that they make it 20% per year. If it’s two years old, they may go to 60%, three years old, 40%. Unless it’s a large number, rarely do they go more than 20% on a settlement. The older the debt, the lower the settlement. The higher the dollar amount, the lower the settlement. If you owe $100,000 and you offer $10,000, you’re probably going to get it. That’s only a 10% settlement, but it is a huge windfall for the collection agency because that collection agency, those larger numbers are where they’re in the 5% range that they’ve picked it up. If they spent $5,000 on it and they pick up $5,000, they’re making money. The higher the dollar amount, the more you can push on the settlement.
This is the most important thing in payment. You never want to not include the pay to remove. We want that negative listing. I don’t care if it’s 7, 6 years old. We want the negative listing removed as part of the settlement. When you’re talking to a collection agency, many of them may be aware of FICO 9. Even if they’re not, then it’s important to run this argument by them usually with a supervisor, not somebody on the frontlines. FICO 9 does not count any paid collection. If it’s paid $10,000 or $10, FICO does not count it in their algorithm. FICO 8 does, FICO 9 does not. If it is a medical and unpaid, even if it’s $200,000, FICO does not count it. If it’s a medical collection, it does not matter the amount. If it is unpaid or paid, it doesn’t matter. FICO does not count it. If it’s under $100, not a medical and it’s unpaid, FICO doesn’t count it.
Let me bracket this. FICO discovered in its algorithm development from version 8 to 9 found out that there was no material difference in people who were paying all of their bills but couldn’t afford to pay their medical bills. The rich and wealthy, if somebody had heart surgery and they were making $500,000 a year and they still couldn’t pay their $60,000 copay for their heart surgery, they didn’t pay their mortgage in their car and their credit cards. FICO found that medical is a completely off the reservation account. That’s the argument that you make with the collection agency.
You know and I know that FICO 9 does not report paid collections. I’m happy to pay it if it’s medical. You can say, “I want a good settlement because FICO doesn’t even count it. This is not doing anything to my credit in FICO 9.” Between you and me, if somebody is using FICO 5, 4, 2 or 8, it is counting against you. It’s going to take another couple of years for FICO 9 to become the installed base. We want to push that creditor or that collection agency towards saying, “Everybody is going to FICO 9 eventually, could you please do me a solid? I’m happy to pay this but I want you to remove it completely. FICO doesn’t keep it. FICO doesn’t count it. I would like for you to remove it so that even cosmetically, my credit report looks amazing.” That is the FICO 9 argument and that is the introduction the first time besides my team that I have put that out into the world. It’s an amazing argument to make in your settlements.
Finally, here’s the exact “language” that I want you to use in a settlement. “If it’s worth it to you to remove it, it’s worth it to me to pay it.” You say that in response to the amount of the settlement, whether you’re at 20% or 80%, you’re talking about the settlement. If it’s worth it to you to remove it, it’s worth it to me to pay that 60%. That’s the language that you use because you’re creating a value proposition for the collection agent. They get paid commissions based on the amount of money that they make, how much they collect goes directly to their bottom line. Every collection agency that I’ve worked with of any note, there are a few that are in the backwaters. Every large collection agency of note has a process for petitioning the bureaus to remove the account, to do the pay to remove strategy. That’s our next play.
The negative indicators for collection accounts, it is not seven years from the date of filing. It is seven years plus six months from the date of last delinquency of the original account. If it’s a collection agency or if it’s a collection account from a gym membership, when was the last day you were late on that gym membership? It could have been two years ago and this account has been sold three times. It’s seven years plus six months from the date of the last delinquency of the original account. Cell phone bills, medical bills, anything, whatever it is from the date of the last delinquency, that is when it begins. The bureau is still round up many times to seven years, but that’s the direction for that 90 months from the original account. It is important to remember that.
What are the legal requirements for somebody? Some of you, we’ve had what we call the V and V letter. The validate and verify letter has gone out for many of our clients. It’s a letter that we give to you to sign and send to a collection agency that’s asking them for their proof of ownership of the right to collect a particular debt. Here are the legal requirements. They have to prove the ownership or that they have been assigned. It’s usually a document that says it’s been assigned. They have to show proof of a debt collection bond. That is a federal debt collection process requirement. Also, proof of debt assessment calculation, “The original debt was $2,000. Why are you collecting $3,500 from me?” They have to prove how they came to that number.
There’s a payment history from the original creditor. They have to show and give you a print out of the original creditor’s payment history showing the date of last delinquency. It’s the entire payment history, but you get to prove the date of last delinquency by the documentation they’re supposed to provide. They are also supposed to provide the name and address of the original creditor. You would not believe when these guys buy, it’s not much the groups that have the API relationship where they send somebody sending an account over and start collecting. The ones who buy 500 debts at a time, they don’t even know the creditor information. You have to have this creditor information to be legitimately collectible. Finally, you have to have a copy of the original contract bearing the signature. This list comes from our validate and verify letter that we would send to you on the collections.The higher the dollar amount, then the more you can push on the settlement. Click To Tweet
What we want is when we ask for this, they have to either prove it or remove it. That’s the language that we want to do in our phone calls when you do a follow-up call. We provide the letters, you provide the phone calls. We can’t impersonate you. In this instance, we want all of this documentation and then they have to prove it or remove it. Those are the legal requirements for being able to collect the debt. What is the legal process for collecting the debt? First of all, the new debt collector, the collection agency has to contact you and give 30 days’ notice to pay it before it will report to your collection. Many of you receive these notices. A phone call does not count. It has to be a letter that says, “You have 30 days to prove this isn’t yours or pay it or we may report it.” There’s not a single collection agency letter out there that says, “Shall be reported.” It says, “We may report it.” They’ll take it seriously and they will report it, but that’s what you have to do.
Watch the mail. Some of these things get sent to all the addresses and whether that’s a nefarious strategy on their part so they don’t have to deal with you and go directly to a derogatory entry on your credit report. If you get a collection notice, then notify your credit advisor. They’ll probably send you to this section of the presentation to watch it again, but they will coach you on what needs to happen. You have 30 days to either pay it, which means also settle it or they will report it.
The good news is collection agencies only report it once when they list the debt when they publish that they have that debt. That’s the only time. If you remove it, it isn’t reported every 30 days. Collection agencies will also call you, but it doesn’t replace what’s called the actual notice of your debt, which is supposed to be through the mail. These phone calls are sometimes aggressive. There are certain rules that they have to follow. We’re not getting into the depths of that. That’s the entire Fair Debt Collection Practices Act. If you’d like to know more, our credit advisors are happy to talk to you. They are all trained on how to coach you through those phone calls.
Usually, the best thing to say is, “I’m giving you official notice to contact me by written letter only.” You have to give them your home address. Do not give them your PCID because we want to keep that pure and holy and prepared only for positive accounts reporting to your credit report. A collection is not a positive account. You give them your home address or whatever other address that you have been using but not your PCID address. They’re also going to send you letters. They don’t send one letter, they may send you numerous letters. They will always say, “Any information we collect is an attempt to collect a debt.” That is the language demanded by the Fair Debt Collection Practices Act.
They cannot call at your employment without your employer’s permission and they cannot call family or friends and tell them that they are trying to collect a debt. They can call your family and friends. I went down and got a Jeep Grand Cherokee. It’s an amazing vehicle, 2018. I’m happy about it. When I filled out the credit application, they asked me for my nearest relative. Why would they ask me for my nearest relative? They asked it because they want to know who to call in case I stop paying my thing. I have a spectacular credit. I’m not going to stop paying it, but I gave them information that would be more difficult to acquire because my nearest relative is in Arkansas. They only asked for that information so that they can hunt you down. Fill out your applications wisely. As the good book says, “As wise as a serpent, harmless as a dove.”
Let’s go to the dispute process with these collections. The dispute process dispute to see if the evidence of the debt can be removed. People ask us all the time, “What do I do with my collection account?” The first thing you want to do is if we can delete the evidence of the debt, let’s do that. Your score is going to go up. Your fundability is going to go up by getting rid of any possible debt collection. The next one is if it’s deleted, your score in fundability improves, but the debt is eternal. The debt never goes away until it’s paid. Somebody may stop collecting it, but it’s still out there. They have the right to contact you at any time.
The second thing is to wait and see if the debt is sold and settle it before they report. We dispute it, let’s say we’re lucky and we remove all evidence on all three bureaus of that debt, but it doesn’t mean that’s gone. It could be sold to a new collection agency and hopefully, we get a letter that says, “Settle it or we’re going to report it.” That’s when we settle it. We can settle the debt and try to negotiate its deletion by the play strategy. The debt goes away, score in fundability improves. The other thing that many of you do is don’t do anything and when it falls off, hope it never gets sold. That’s the worst possible scenario. Our recommendations are always to do one round of disputes, see what we can remove and if it’s removed, wait for the debt to come back to us and be prepared to settle it and pay it, or settle it and then negotiate its deletion.
Many times, some of our most successful clients have sought to settle it. If you have the resources, settle it. Part of the negotiation is if they seek to remove it or say that they’ll remove from the bureaus, then you pay it off. If they say, “No, we’re not going to do it. We’re not going to remove it,” then we go to the number one dispute model and negotiate it later. Do not pay off your collections without talking to your advisor team first. There are no exceptions, because we want to get the highest yield. Many times, people say, “I got a windfall. I paid off all my debts,” then they’re wondering why their score isn’t improving.
Love the show? Subscribe, rate, review, and share!