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How Bad Are Bad Debts?

How bad are those bad debts?   Collections, charge offs, late payments, foreclosures, repossessions and other bad debts all affect your credit reports and none of them are good.

The following explains how bad a bad debt really is.

Late Payment:  A late payment has different levels of classification as a bad debt or negative debt.  If a late payment was made a few years ago it is negative but it is less negative than a late payment made a month ago.  The fact that a late payment is on your credit reports adds to the lower credit score you receive.  When you are trying to get a major loan for let's say a mortgage, a late payment can in fact cost you several thousands of dollars simply because it may mean the difference is a 1/4, 1/2 or 1 point of interest.  On a large loan such as a mortgage this is a major bad debt but in realistic terms a late payment is not terribly negative it adds a lot of weight when there are other negative items reporting on your credit reports along with the late payment.  The other thing to look at with a late payment is:  How late was it?  Was it a thirty day late payment, sixty day late payment, ninety day late payment or more?  Once you get past the thirty day late payment this is getting to the point where even the late payment can be as negative as a collection or charged off account.  Then you need to consider how many late payments were made on a particular account.  The more late payments made the more negative an account becomes.  As you can see there is a lot of information within the information of a bad debt.  This is why it is sometimes in your best interest to use a company who has knowledge about credit, credit reports and credit issues.  It is well worth the money considering the money you will save.  It is actually an investment that pays off for many years to come.

Collection: A collection account is a bad debt.  Just to give you an idea of how the credit scoring system works.  Collection accounts, charged off accounts, profit and loss accounts, repossessions, foreclosure, liens, child support and almost any other negative credit item except late payments, falls in to this category of a "9".  A score of "9" is the most negative score you can get on a credit report.  Late payments score as a "2", "3", "4", "5" ... the higher the number the more negative the late payment is so as you can see a "9" is the end of the road bad debt.  The more collection accounts you have the more negative the bad debts are.  It does NOT matter how much money is owed on the debt either.  If you owed a collection in the amount of $5.00 and you owed a collection in the amount of $500 they both score "9".  The other misunderstood thing about a collection account is "Paying off a collection does NOT help your credit scores".  Many times paying off a collection account, even though we know it is the right thing to do, does NOT help your credit ONE BIT.  In fact it can actually hurt your credit.  It can start a clock that is used to make a bad debt obsolete causing the bad debt to remain seven years from the date you paid it instead of from the date it was closed (last date of activity)  Before you make a decision to pay off a bad debt you should understand the results of what could happen if you pay off the negative item.  Again, a company who specializes in credit problems is going to know immediately what your best option would be.  Once you pay something it is hard to undo the damage.  This is not to say we are advising you to not pay debts you owe we are more in to protecting you from paying debts to those who intend on causing you frustration by you doing the right thing.

Charge Off:  A charged off account is simply a collection that the creditor is charging off as a loss.  By doing this the company is filing with the government that they had a loss of money on your account.  This means "TAX BREAK" for your creditor.  Charging off an account, HOWEVER; does not mean the creditor will stop collections or trying to recoup the money.  If they can scare you in to paying the debt all they do is report to the IRS that they now have income from this debt.  A profit and loss account is the same as a charge off so the same rules apply.

Repossession:  I think everyone knows what a repossession is.  I am not sure everyone knows that things besides cars can be repossessed.  For example, furniture can be repossessed if you were using it as collateral or if you purchase furniture on a payment plan from some of the furniture companies.  In other words if you default they can take back the furniture and put repossession on your credit report.  Not to worry, it scores a "9" like all the other bad debts, but if you were to try and obtain a car loan, they may deny it simply because you have had a repossession, even though the repossession was not of a car, boat or other recreational vehicle.

Foreclosure:  A foreclosure again can be for other types of loans, not just for a home loan.  Most people will file a bankruptcy before allowing their home to be taken from them.  Bankruptcy was devised for this reason "to stop creditors from having a field day with your possessions".  With the new bankruptcy laws it is very important that you have an interview with an attorney when anything affects your ability to maintain payments on your credit accounts.  You have to protect your assets any way possible.  A foreclosure is a "9" rated account.

Lien:  A lien is normally something the IRS puts on you for non payment of taxes.  A lien can actually halt all credit activity even if your credit is in good standing except for a lien.  In other words a new creditor or one you are trying to get credit from is not going to feel safe giving you a loan when you have a lien that could take your property from you.  This is especially true if you are trying to get a home or auto loan.  Even if you are lucky enough to get a lien off your reports if it is connected to a government entity there will be another posting of these liens in what is called "A government lien search".  This means if you are trying to get a government loan it will be found when they do this search.  A government loan can be for a student loan, FHA loan, VA loan, Small Business Loan or many other types of government applied for loans.

Government Student Loan:  A student loan from the government is probably one of the most destructive loans you can have if you default on them.  Not only do defaulted student loans remain on your credit reports for life if unpaid; they can multiply.  Student loans are reported by the student loan company in semesters, so each semester shows as an individual student loan and can report negative information on each loan if you pay ONE of the loans late.  What happens is that each defaulted student loan will now become negative along with the one you missed paying on.  If you continue to default to the point of collection status then all student loans will go to the same status. It also gets worse once you have defaulted for a few months the student loans will now become negative through another student loan company and by more down the road if left unpaid.  When  new company picks up the defaulted student loans they will report them all again as defaulted student loans.  You could end up with 20 collections for four student loans.  The best way to resolve student loan debts is to call the student loan company and ask to be put on a Student Loan REHAB program.  If you get on a student loan rehab program and make your payments on time they will remove all negative information about the student loans which lifts you out of the cycle of collection accounts.

Judgment:  A judgment is usually a bad debt taken to the next level.  For instance a collection account may be taken by your creditor or a collection agency who will then file a suit with the court to try and retrieve money owed to them.  Some creditors are now taking things to arbitration and this is stated in your card agreement that they can allow a mediation company to decide the fate of a bad debt.  What happens first is you will receive a notice of either arbitration or of a court date. These things are sent via certified mail or other verification methods.   In either case you need to follow the directions and at least respond if it‘s arbitration or show up in court if it is s suit.  You don’t want to get a default judgment.  If you show up at least you have a chance, if you do nothing you have no chance.  Judgments are rated as a “9” and again affect your credit a lot in the negative direction.  Some creditors do not grant loans to those with judgments on their credit reports.

Child Support Defaults:  Another bad credit situation to get caught in is with defaulted Child Support payments.  This is the same as unpaid taxes, unpaid student loans and other government accounts.  Not only can you be arrested and put in jail for failure to pay child support defaulted payments never get removed from your credit reports until they are paid and then it can take seven years for it to be removed.  You can have your wages garnished (money taken directly out of your pay checks before you get it from your employer).

Personal Information Errors:  Credit reports also contain ALL your personal information, name, maiden name, social security number, date of birth, address, telephone, spouse, work history on top of all this the reports show your previous addresses, names and other information.  You must keep your personal information accurate on your credit reports as this is how a lot of people end up with other people's accounts on their reports. Nine times out of ten other people's accounts will not be good debts, they will be bad debts. This is not uncommon and happens a lot.  Statistics show that there are two out of three credit reports with errors.  We believe there are NO credit reports without errors, even if it is just an address error we have not seen a completely accurate credit report until we have worked on the credit reports and cleaned them up.

Bankruptcy:  Bankruptcy is another negative public record item, HOWEVER; those who have filed bankruptcy can have a FRESH start with credit if they just clean up the reports after filing the bankruptcy.  If you clean up your credit reports after filing a bankruptcy you can score just about as high as a person who has never filed a bankruptcy and has no bad debts.  WHY?  Because, bankruptcy was something given to people as a way out of debt.  By giving you a way out of debt they have also given you the way out of a low credit score if your credit reports are cleaned up. This is the missing step for those who have filed bankruptcy. The average person who files bankruptcy cannot get credit for SEVEN YEARS OR MORE if they do not clean up the credit reports.  The average person who files bankruptcy and cleans up their credit reports gets credit within six months to a year.  This is the little known fact of filing bankruptcy but those who figure it out are buying homes and cars after basically filing a bankruptcy a few months ago.

Authorized User: Did you know that you are not responsible for accounts listed on your credit reports as "AUTHORIZED USER ACCOUNTS"?  It's true, an authorized user account belongs to the person who opened it and who added your name to the account.

Can Creditors Or Collection Agencies Sue:  Yes, you can get a lawsuit against you from either a collection agency or creditor.  Normally if they think you have something to get they will file a lawsuit.  It takes time and money to file a lawsuit so this is not the first thing that will be done but in each individual case a lawsuit could be in the works.  If you do get a lawsuit just follow the directions and keep any court dates otherwise you will get a default judgment added to your credit reports.

A Collection Attorney:  Any attorney who is collecting for a debt is under the same guidelines as a collection agency and must follow the rules and regulations set forth in the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.  The name Attorney does not give them special precedence.  If a collection attorney sends you a judgment notice YOU SHOULD however, make sure to keep any court dates or arbitration responses and follow the directions so that you do not get a default judgment.

Applying For Credit:  Did you know that most credit lenders use a third party source to pull your credit reports?  What this means if you just recently had something corrected on your credit report with any of the credit bureaus it may not be reflected on the credit report the lender is pulling for a full thirty days after the credit bureau has corrected the problem.  WHY ... because a third party software company that stores credit reports in their data base MAY NOT have updated their software.  Most do not update but once a month, the reports are not in real time from the credit bureaus and this can cost a person credit and money.  You should look at your real credit file directly from each credit bureau so that you know what is showing and what scores are being given to you.  We have a website that is designed for you to make a choice on where to get your credit reports and scores. CreditCrossroad.Com  You can get a ONCE A YEAR FREE credit report at:  AnnualCreditReport.Com They may not offer you a credit score at this time but it is your credit file in real time.

Credit Scores are a combination of all your GOOD CREDIT and BAD CREDIT.  Credit Scoring is the hardest thing there is to figure out but in essence it all narrows down to how much of your credit is good credit and how much of it is bad credit, then you sprinkle in a lot of other factors ... once this is all simulated by the computer OUT pops your credit score.  Then to make matters even more difficult there are three different scores because each credit bureau uses a different method of computing a credit score, each credit bureau also reports different creditors so the end result is three credit reports that each have a different credit score.  The median credit score is what most creditors want to see and that is not your highest or lowest score it is the one in the middle.

This page is designed to give you some insight in to the credit world.  Bad debt is ... what it is ... fighting your way out of credit problems is an option.  You just have to want to do it.  Credit is one of the most important assets you have in today's society.  Take care of it. Clean up your credit reports.  Check your credit reports often and try to keep payments made on time to your creditors.  Credit is something you don't really miss until you need it.  The biggest problem is that most people only find out about credit problems when they need it and cleaning up credit reports takes time ... usually about 6 months or more so don't wait until the last minute ... do something now.

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Page Last Updated
Sunday July 01, 2007