Credit card companies often face challenges when trying to collect on unpaid accounts where the buyer has defaulted. Most of the time the companies will pursue these debts as long as they feel it is practical, and then they write off the uncollected amounts as a loss. Despite the fact that the debt is officially written off, that isn’t the end of the collection efforts in most cases.
The Debt is Sold
It’s not unusual for credit card companies to give up on old, unpaid debts based on the assumption that they’re not going to be able to collect. While this generally stops any collection action from the credit card company itself, such debts are often sold to third-party collection agencies for greatly reduced amounts. These agencies then pursue debt collection, sending letters and calling the debtor in the hopes of recovering some of the money.
Debtors Can Be Sued
In some cases a credit card company or collection agency will take legal action and sue the debtor for the repayment of any outstanding amounts. Since this is a formal court proceeding, a marshal, deputy sheriff or other local law enforcement officer must serve the debtor with a subpoena. He then has the right to appear in court to explain why he doesn’t owe the debt. If the judge finds in his favor that’s the end of it, but in the case of a legitimate debt, the judgment is typically in favor of the agency.
Without a court order, the collector’s options for collecting funds are limited to calls and letters asking for payment. If the agency gets a judgment against the debtor for the outstanding amount, other collection options become available, including garnishing wages or removing funds directly from the debtor’s bank account without further notice. Specific methods of collections can vary by the debtor’s state of residence and the amount of the debt.
Lump Sum Settlements and Forgiveness
Another collection tactic often used by credit card companies and collection agencies is to offer the debtor the opportunity to settle the entire debt with a single lump sum payment. In this case, the company offers the debtor a chance to pay a portion of the unpaid debt. The balance of the amount will be written off and is forgiven, canceling that part of the debt. The settlement amount is typically 50 percent or less of the total due. Debtors should know that such settlements can negatively impact their credit reports for up to seven years, and if the write-off is more than $600 it will be reported to the Internal Revenue Service as income.
Before unpaid credit card debt ends up with a collection agency or in court, it’s possible for debtors to seek better repayment terms by renegotiating their debt. Most credit card companies prefer to work with debtors in the hopes of getting the debt paid in full. Debtors can ask for a change in the card’s interest rate or a reduction in payments to make the debt more manageable. Re-aging the debt brings it current and stops negative reports to the credit bureau, late fees and penalties.
- MyFICO: How to Repair Your Credit and Improve Your FICO Credit Score
- Kiplinger: If I Negotiate a Payoff will it Hurt My Score?
- The Washington Post: Credit Card Firms More Willing to Negotiate With Customers
- CNN Living: How to Settle Your Credit Card Debt
- Bills.com: Credit Card Debt Settlement
- DebtAmerica Relief: Debt Settlement Frequently Asked Questions
- Bankrate: How Overdue Credit Card Debt is Bought and Sold
- Federal trade Commission: Debt Collection