First, it’s best to never have a collection agency account on your credit report. Should you end up with such, particularly a medical collection which as this New York Times article explains is quite common; you may be able to negotiate a settlement of the collection account for a deletion of the collection account from your credit history. All collection accounts are subject to a negotiated settlement for deletion.
This negotiation should be approached as a matter of fact. Your expectation is to negotiate a settlement of the collection account in return for a deletion of the collection account from your credit report as the conclusion. For best results, avoid confrontation and keep in mind it’s easier to catch flies with honey than vinegar.
This is a simple business proposition; there is no need to complicate the matter with emotional involvement. Some may fare better with a professional third party negotiator as opposed to attempting to bring a successful resolution on their own. Engaging a third party is, of course, a cost -vs- benefit analysis. This cost analysis must include the benefit of having the collection removed from your credit history.
The Settlement for Deletion Process Involves Two Distinct and Separate Steps
The steps are these:  Contact the collection agency and negotiate the settlement. This will involve a mutual agreement to an amount and a date by which you will provide good funds to the collection agency.  In exchange for this settlement agreement, the collection agency shall agree to provide a letter outlining the terms of the agreement which will state the amount, the date and the fact that the collection agency will delete the collection item from your credit report upon receipt of your good funds.
You may expect to have to make more than one effort to achieve success. Experience proves it is easier (relatively speaking) to negotiate such an agreement closer to the end of the month or quarter than at the beginning of the month or quarter. The reason is this: their collection goals may not have yet been met and the end of the goal period grows nearer.
You may expect the agency will not remove the derogatory item from your credit report. This is where your mortgage professional will be of great help for you in helping you get this item removed from your credit report by assisting you in getting the item permanently deleted from your credit report.
Removing a Disputed Item from a Consumer Credit Report
The quickest way is for the borrower to obtain a letter from the creditor or collection agency (the letter must be from the same entity reporting it to the bureau(s) stating specifically that the dispute has been deleted. The mortgage professional can have this processed directly with the bureaus as a “re-score” in three business days.
This “re-score” procedure is available only to mortgage professionals who subscribe to participating credit report providers which work directly with the three credit reporting agencies. The following guidelines have no tolerance for deviation:
• Letter must be from creditor reporting information
• Must be on company letterhead
• Must contain the account number
• Must be dated after the last time creditor reported information to bureau
• Cannot be hand-written
• Must come from a person (not a department) and have a phone number
• There is a cost which is based per trade line, per bureau.
Incidental Related Information
Aged collection accounts are not as harmful to your credit as are newer collection accounts. Either may be settled for deletion. Older derogatory accounts count less against your credit score than newer derogatory accounts.
Accounts that were credit reporting accounts which become collection accounts do much more damage to your credit than the odd medical bill that may have ended up in collections. Of special note regarding small-balance collections accounts: the latest FICO 8 scoring engine ignores small-dollar “nuisance” collection accounts in which the original balance was less than $100.
The Date of Last Activity (DLA) show on consumer credit reports determines, in large part, the Statute of Limitations of when a debt will no longer be collectable. Again, the older the account, the less it counts against your credit score. Paying an older account will likely do more harm to your credit score than good. Yes, this thinking is counterintuitive; however discuss this with your mortgage professional before paying an aged collection or ‘charged-off’ account as such action will update your DLA resulting in new derogatory information.
Judgments and Open Credit Report Disputes
A step far worse than a collection account on your credit history is a legal action against you over a collection account which results in a judgment reported against your credit history. To be clear, a judgment is a legal action which becomes a public record. This is a now a debt with legs, so to speak, and may have further negative repercussions. Other examples of a legal action resulting in the creation of a public record are, among others are: bankruptcy and foreclosure.
Open disputes on your credit report (other than certain medical items) are a problem with mortgage underwriting. Until such time as disputes are resolved and closed, they may prevent you from obtaining approval for a home loan.
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.