Settle with the Original Creditor Before the Debt Gets Sold

By: Travis Robbins
Submitted: 2007-01-17 16:17:36
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As a practicing attorney for more than five years I have faced a number of interesting creditor/debtor issues. One issue I have faced deals with businesses that buy delinquent debt from banks and other lending institutions. The following is a summary of the problems faced by debtors in this situation and a suggestion for avoiding such problems:

One Common Scenario

One common debt scenario goes like this. The debtor obtains a credit card from a bank or other lending institution. The debtor loses his job and cannot make the credit card payments. The bank starts sending "late payment" letters, but the debtor does not respond. After three months the bank stops sending the letters and the debtor assumes the bank has "written off" the debt and that the debt has gone away.

The debtor's assumption could not be further from the truth. Although the bank may have "written off" the debt, this term is merely an accounting term and does not mean anything with regard to the bank's right (or desire) to collect on the delinquent credit card account.

Instead, what most banks do is report the delinquent account to the big three credit reporting agencies (Esperion, Equifax and Transunion) and place the account into a portfolio of bad accounts to be sold. After six to nine months the portfolio is sold to a business that purchases bad debts for literally pennies on the dollar. The business that bought the portfolio then pursues the debtor through either a collection agency (you've heard of the midnight telephone calls and phone calls at work) or a collection law firm.

The Problem Under this Scenario

The problem the debtor faces in this scenario is that the original bank reported the delinquent debt to the credit reporting agencies. That means the original bank must also report when the debt is paid off. Once the debt is sold, the business that bought the debt cannot legally report the debt as paid off without some document by the original bank regarding the assignment of the debt to the new business. Banks usually charge the new business for providing this document.

As the new business does not feel any obligation to make sure the debt is reported as paid off, very often it will not even tell the original bank about it. As a result, the debt remains on the debtor's credit report indefinitely.

Now you may argue that the bank and the business that bought the portfolio are legally obligated to make sure the debt is reported as paid off. It has been my experience that a lawsuit is usually required to get the debt purchaser to actually make sure the report is made. Few people have the funds to file such a law suit. If they did, they would not have been delinquent in the first place.

The Solution

If you are delinquent in your payments contact the issuing bank immediately and try to work out some type of reduced repayment plan. Do this even if the bank has not contacted you for months because they may still own your account. Again, once the debt is sold you will have a much more difficult road back to health credit.

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