Step 4 - Fixing Collections and Charge-offs

If a phone bill, credit card, medical visit or some other debt isn't paid, a company will often hand the debt over to a collection agency.  If they do not, they might do a "charge off", which means they write off the debt you owed them as a business loss.  Either way, this is a mark against your credit.  One good thing is that they may not be expecting to ever get their money back.  You may be able to negotiate with them and pay them less than the amount owed.

There are some home loan programs that don't take into account collections and charge-offs.  These programs are typically short-term fixes.  If you need a home loan now, you may still qualify with collections and charge-offs.

Take these steps to clear the collections and charge-offs from your credit:

1. Call the company that reported the debt unpaid.  Your credit report should have the contact information for the companies you've done business with.  If not, try looking up the company online at www.google.com or www.dexonline.com.
2. Ask the company what the balance of your account is.  If you can, tell them the account number or the last date reported from the credit report.  If you don't have the account number, you may need to give them your personal information.
3. Politely explain to them why the account was unpaid.
4. If you don't have the money to pay your account in full, you may negotiate with them.  Say, "I would like to settle this account with you, but I'm unable to pay the account in full.  How much would I have to pay you in order for the account to be considered paid?"  Do NOT tell a creditor that you are trying to get a home loan.  This will hurt your ability to negotiate.  If they ask, say "I just don't feel right owing you money and I want to do my best to fix it."  If a creditor hasn't been paid, they often decide that some money is better than no money.  If a creditor won't negotiate, tell them you'll have to pay the account at a later date and move on to the ones that will.  You can call a couple of months later and repeat the process with a creditor; they may change their mind and be ready to settle.  IMPORTANT: If a settled amount is more than $600 less than what you owe, you may get a 1099.  The IRS considers the settled amount income - so keep record for your taxes!
5. When the creditor tells you how much you owe, or how much they will settle for, ask them for it in writing.   Do NOT pay them until you have it in writing.  The letter from them should have the account number, the amount they will accept, the date they will accept it by, and that they will consider the account paid. For example, "If we receive $135 by 11/10 we will consider your account #xxxxx paid in full."   
6. Always pay with a personal check.  Do NOT pay with cash or money order. 
7. When your check clears, get a copy of the cleared check from the Credit Union or your bank.
8. Send a copy of the letter and the cleared check to each credit reporting agency.  Your credit report should be corrected within 45 days.

The collection agencies and companies with charge offs care more about the money you owe them than they do about your credit.  They will probably NOT update your credit report.  That's why it is important to follow the above instructions, keep all the papers, and fix it yourself.  If fixing it yourself is overwhelming, there are reputable services that will do it for a fee.  If this service interests you, please contact me and I will refer you to them.