Debt Settlement

Collections… To Pay or Not to Pay (Part 1)

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Woo Hoo! You Qualify… But…

You’ve decided to buy a home, and your lender informs you of collections on your credit report and are told by your loan officer to pay them off. You couldn’t be more excited, you you do qualify, but they want to get a better score so you can get a better rate or maybe you need a better rate to qualify for that wee nicer home you’ve been looking at.

Who’s the expert, your lender of course.. so you run right out and pay off those collections… Sigh. Oh my! Yes this age old advice is still being dispensed by loan officers far and wide. So what does actually happen when you pay them…

After you submit a payment to the collection company, what happens is SO unpredictable. here’s a list of some of the things that COULD happen as a result of you acting on your lender’s ill-dispensed advice.

  1. The collection agent (CA) verbally says they will remove the item. In my 30 years experience I’ve found those guys will tell a consumer ANYTHING to get the cash. Don’t count on it, if they don’t put it in writing it’s not likely gonna happen.
    RESULT: Score will likely drop.
  2. The CA does give you a letter, but it’s not a deletion letter. Yeah, they TOLD you it was a deletion letter but it says “Paid/Satisfied/Settled/0 Balance or some other non-deletion verbiage.
    You’ll send in the letter but the bureau will update the item as PAID and they won’t delete it.
    RESULT: Score will likely drop.
  3. The CA actually deletes the item from the credit. Wow, this is so rare and it happens less and less because of blow-back from the credit reporting agencies (CRA’s) against the CA’s.
    RESULT: Awesome
  4. The CA does nothing. You have a receipt for the payment, but no deletion letter and they don’t update to the bureaus.
    RESULT: Your score didn’t change at all.


Penalty for good behavior.

In almost every case the credit score drops or stays the same as a result of paying off a collection. Now, instead of getting closer to that dream home, you’ve potentially just screwed yourself out of it. But don’t worry, your idiot lender will now tell you you only need just a few points and do this or that and we’ll get you qualified again… <clunk>


In part two we’ll talk about good deletion letters and why oh WHY does the score go down with a payoff….


Yours in Wealth!


Credit Guru Ruiz


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What do I do with this collection letter?



Another common question from our clients:

I received a collection letter in the mail, what should I do now to protect my credit rating?

There are several steps here, so please follow them closely.


Step 1. Identify the letter.

Often what appears to be a letter from a collection company is actually a bill from the provider or original creditor (OC). If it’s a bill then read on, otherwise skip to Step 2.

Your options here are to pay the bill in full, or call the OC and make payment arrangements because the goal here, is to keep the bill out of the debt collector’s hands and off your credit report.

Some techniques for negotiating bills not in collection yet:

  1. If you have a past due medical bill and make small payments EVERY 25 days (not 30) it will usually keep the bill out of the collection system.
  2. You can also have a large hospital bill audited which will usually reduce the bill significantly.
  3. All hospital bills should be detailed and you should be able to identify every charge, if they won’t give you one or help you understand it, ask for an ombudsman from the hospital. It’s been well documented that most hospital bills contain MANY overbilling errors.
  4. Negotiate for a cash payment, often you can get a significant reduction for cash.

If it’s not a bill and it really is a collection letter follow these rules then continue to Step 2.

  1. RULE #1 Never contact a collection company, especially by phone (except by mail: Cease and Desist, Validation, Intent to Sue letters and Settlements)
  2. RULE #2 Never make a payment to a collection company (without professional help)
  3. RULE #3 Never trust a collection company or their employees
  4. RULE #4 Document/record everything you do regarding this collection.
  5. RULE #5 Never volunteer ANY information to them, ever.

Step 2. Identify who the OC is:

If the collection letter doesn’t clearly reference who the OC is, then they probably can’t prove it either. Often a debt is sold many times and that is why you can find several listings on your credit report from the same debt. Figure out who this debt was originally owed to without violating Rule #1.

Step 3. Identify if the debt is past the statue of limitations (SOL)

There is an SOL for reporting to the credit bureaus, and there is another SOL for the time the debt collector (DC) can bring an action against you (sue you in court)
The statute for reporting to the credit bureaus for private debt is 7 years from the first date of continuous delinquency. Any private debts still reporting after 7 years have been re-aged and must be removed from your reports.
The statute for collectibility (through an action in court) varies from state to state from 3-15 years. If the debt has passed the SOL for your state, you have NO LEGAL responsibility to pay it and if you ask them to, the DC’s must cease all collection activity. So do that with a Cease and Desist letter.
Often dirt-bag DC’s will attempt to collect on a debt that you no longer owe (Stale debt). Since many states have different laws regarding their SOL, you should do your due-diligence. This website would be a good start. SOL in all 50 States. It’s important to know that if a DC offers you a payment plan on a debt on the last month before the expiration of the SOL; and you make a payment, (or even in some states “acknowledge the debt on the phone or in writing”) the statue of limitations will be reset and that clock starts over again! Again, DO NOT contact the DC under any circumstances.

Step 4. Use Validation, Failure to Validate and Intent to Sue letters

Send lots of certified mail on each of your debts that have reported to the bureaus, if the collection letter comes from a new company you know isn’t on your credit report, VALIDATE the debt within the first few days you get the dunning letter, most of the collectors that get a validation letter right away, never report it to the consumers credit bureau. If the debt is stale debt, send them a Cease and Desist letter.

Step 5. Sue them if they break the law

If they miss a step and the debt is less then $1,000, sue them. But you only have 12 months to start your lawsuit after they violate the law.

Step 6. If the DC validates and the debt is within the SOL, Settle it.

First off, never settle a debt with a DC without a deletion letter.
If you owe the debt and are financially ready to take care of paying it off make sure you settle the debt and request a deletion letter so that the listing is removed from your credit report otherwise it will still hurt your credit score even if you pay it off. Why? Because the date of activity on the credit report is updated on your credit report thus appearing as “recent collection activity” which will often cause a drop in the credit score.

Remember Rule #3? Don’t trust them to “send an update in the next 30-90 days”, they won’t and don’t, you’ll need the letter. Often they will tell you they will give you a deletion letter, but the wording on the letter will say “paid”, “settled”, or “satisfied”. That verbiage will NOT get you a deletion from the bureaus. Don’t give them money till you have a “good deletion letter”.
Although this process is daunting for many people, you can do it yourself if you have deep discipline and focus. If you don’t’ think you can “stay the course” and finish this process alone, you should hire a professional at the start to help you through the process. Feel free to contact us at any step you find yourself in, we’ll be glad to assist you.

For your wealth, health and prosperity.
Credit Guru Ruiz



What the heck is a 1099c and why did I get one?


Another question from a client…


“Why did I get a 1099c and what do I do with this, I thought I was all finished with this crappy company?!?”


Yuk, it’s like the final “screw YOU” from an old creditor or collector.


If you don’t do anything, it’s likely gonna cost you something… Do nothing and the IRS may send you a bill with interest and penalties (possibly YEARS from now). So, by all means read this post and do a little something to prevent that last “finger in the air” from actually hurting you.


Why did I get this?

You may have settled a debt with them and the amount on the 1099c is the amount they discounted from the original debt… if you did not settle it, then they likely wrote off the entire balance (as  it was in the 6th  or 7th year of delinquency) and thus sent that 1099c (forgiveness of debt). You must report that on your taxes as income but may not be required to pay taxes on it under certain circumstances.

If you qualify, (check with a tax professional) you could use the Insolvency option to not have to report that money as income and therefore would not have to pay taxes on it.


Please read the following two links


If you just can’t get through that, please contact an IRS support line or your tax professional for help.


As always,

To your Health, Wealth and Liberty

Mark Ruiz


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“I can’t afford to pay my credit cards anymore…what do I do?” Part 1

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I have $120K in credit card debt, primarily as a result of financing a business which took a big hit from the recession. Some of the cards are “Business” cards others are personal (about 7 cards). Interest rates all over the map (6-24%) I have paid the minimum monthly payments of all them on-time many I’ve had for more than 10 or 15 years. I believe I’ve had maybe two 30-day late payments (by accident) in the past 7 years.


I’ve done my homework. I’ve attempted to negotiate lower rates but because I have no history of not being able to pay, the only way I can get lower rates is to have a Debt Management Service (DMP) negotiate them.


I have determined that I can no longer make the minimum payments on all the cards (it has eroded my savings to nothing) and I need to build back up an emergency fund, resume saving for retirement and childrens college. I have $200K equity in my home which is inaccessible as I already have the max mortgage I can qualify for. Moving is currently not an option (for reasons I won’t go into) and bankruptcy is not an option as the judge will see I have enough equity to erase the debts if I sold my home.


I’m trying to determine which strategy will have the least negative effect (both credit score wise and length of time that it effects my credit score):


a) Enroll in a DMP. This will make it so I am unable to access the available credit which in order to make ends meet I have to do each month (as a result the balance on a couple cards are not going down) This also runs the risk that further hardship will not allow me to make the DMP payments. So I would only enroll half the cards in this with highest interest (two which are closed anyway due to the original bank going out of business.) Credit Counseling agencies are unable to provide clear answers on how the DMP will effect my credit. They say it varies on the creditor and how the report it.

Wow, so far I must say I’m impressed with your research,  you are far more educated then most people, but I must say again that it amazes me how many people get really bad advice from “experts” that have no practical experience outside of their own field/job or what they need to know to “sell” you a service.

I’m going to answer this very long question in a couple posts…

To clarify, I’m assuming in my answers you have been making the minimum payments on these cards from savings, and are unable to continue doing so with your current income…

DMP in my opinion is one of the worst things anyone can do, it’s just really sad to say it but it’s true. DMP when it’s free, is paid (mostly secretly) by the Credit Card industry and it’s purpose is to MILK out the last pennies a morally responsible debtor has before they finally file for BK.

The bad DMP’s will promise to improve your credit over time (but most have such horrible accounting practices that you’ll end up with LOTS of late payments while they manage the program.) They will of course have lots of excuses over the phone and hidden in their contracts as to why the late payments were inevitible, expected and not their responsibility, although they will never tell a client before they sign that they most likely will have many late payments in the process. The client EXPECTS that their credit will improve over time and although in theory the score will improve because the debt to limit ratio improves, it will NOT improve until you get NEW credit cards with available limits, so the score improvement did NOT come from the DMP service.

The good ones will successfully negotiate a lower payment and in some cases drop interest rates to zero, but you’ve obviously done the math… if you have been paying these payments from savings and that is gone, you can’t afford to pay a large enough payment to actually get the debt reduced.

A person in a DMP is reported by the creditors to the credit bureaus… ALL of them that participate (and some that decline) will report you as “in debtor repayment program” or something similar. Your credit score will TANK as badly as if you filed a Chapter 13, and if by some MIRACLE you don’t rack up late payments from the DMP mis-management of the payments. All of your creditors will RARELY change the listing back to paid as agreed, without the threat of a lawsuit. (some will, some won’t but it only takes ONE notation on the file to trash the score.)

IF by some chance, the DMP OR the creditor agree to reduce the principle balance they WILL report the paid acct as “settled for less then the full amount” and this notation will tank your score for the next 7 years.

Enrolling 1/2 of your cards won’t hurt your score more or less then just one of them. Once you enroll, and the first notation hits the credit file, ALL your credit cards will close/reduce your available credit, you won’t have any available credit.

Your option b… stop making credit card payments for 2-3 months is equally flawed. I will cover this in more detail in my next post…


For your Health, Wealth and Liberty

Mark Ruiz

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