Making sure bad debts are gone from your credit report

Get it in writing, know the law and don't restart the collections clock


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I have an account that has been in collections for seven years. I made a payment arrangement with the company about three years ago and have made all payments on time. The company refused to change my status from "in collections" to "paying as agreed." They also refused to even send me a letter stating the arranged payment plan. Here is where my question comes in. This past month they fell off my credit report. If I stop making payments to them now, can they resubmit and go back on my credit for the same debt?  -- William 

Answer Dear William,
Here's the deal: Unlike credit card companies, collection agencies are not required to notify the credit bureaus of a person's installment payments. There is no "paying as agreed" status while you're in the process of paying a collection agency. 

This means that if you owe $1,000 to a collector, but are making regular payments of $150, your reports won't indicate a declining balance each month. However, if you satisfy the debt, either by deleting the balance in full or by settling the debt for an agreed-upon lesser amount, the collector is required to update your report with that information within a reasonable amount of time. That's about 30 days. 

Unless, that is, the collection agency cannot report the account at all because it's timed out. As per the Fair Credit Reporting Act, debts that have gone into collections can only remain listed on a consumer's credit file for seven years, whether it's been paid off or not. That's the good news. The bad is that you may not be absolutely safe from other repercussions. 

When you began repaying the collection account, you also restarted the statute of limitations time frame for lawsuits. That is the number of years that a creditor may use the courts to collect an unpaid account. How long that may be is state specific, so check for the statute of limitations in your state. That means that even though your credit reports might be free from any evidence of the bad debt, the collection agency may still sue you for a balance due. 

Now, back to your payment plan. Of course you should have put your agreement in writing, but all is not lost. Unless you've been sending cash (never recommended!), you should have proof of what you have sent the collection agency, such as cashed checks or money order receipts. Tally them up and subtract that figure from the balance you started. That's what you now owe. 

If the remaining debt is substantial (a figure not set in stone, but usually at least $1,000) and the statute of limitations is still in effect, be careful about stopping payments. The collector may still come after you if it believes you have the funds, but are deliberately holding out. If the debt is very small or you can no longer be sued, you may be in the safe zone, but I still wouldn't take the chance of stopping payments as old debts have strange ways of coming back to life.

In the meantime, keep records of your payment plan on hand just in case you are contacted, and be prepared to cite the Fair Credit Reporting Act and your state's statute of limitations for collecting on a debt if a lawsuit is ever threatened.

In the future, never consent to alternative payments without a written contract again. Even a letter sent by you, outlining the terms of the arrangement can suffice. Such clarity behooves both parties.

See related: Don't restart the clock on expired debts

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Published: February 26, 2014

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Updated: 10-24-2016

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