Credit Repair 101

We are firm believers that you can do anything you want if you put your mind to it.  It's no different when it comes to cleaning up your credit.  Just getting started is the hard part.  If you feel you need professional help you can use an attorney. I never recommend going to a credit-cleaning clinic - do not risk your money. There are bankruptcy attorneys that do credit repair as well; you can find a reputable attorney through your local Bar Association. There are reputable consultants who have been successful at helping to correct negative items from your report, but they are few and far between.  I know, I am one of them, and I have seen some pretty rotten people out there who count on you to be gullible. There are never any guarantees that you are anybody else can remove negative items from your credit report, but that doesn't mean you should just give up and let things go.

There are several factors that will determine if your negative item will be removed or not. These factors include accuracy, timing, employees, creditors, account balances and other factors.

When you see advertisements saying, "We remove bankruptcy, judgments, charge-offs, collection accounts, liens..." this is not quite false advertising. In the majority of cases, they remove this information because it is almost time to be removed, it is past time to be removed, or the consumer pays off the debt. I myself can make that claim, but I do not want to mislead anyone. If you feel you are being misled by a credit clearing agency look up the Credit Repair Organizations Act.  This regulates them and is very interesting to read. They walk a gray line on the interpretation of the law when they make these statements. My love of these places is obviously very low, because I have seen far too many people taken advantage of.

Bankruptcy, judgments, and liens are public records information. Anybody and their brother can go down to the public records office or county courthouse and hand the clerk a piece of paper with your name and address on it to see if you have a judgment against you. I have seen public records information removed from a consumer's credit file before it was time to be removed. As I explained earlier, it was almost time for the information to be removed. It's a hassle for credit bureaus to verify public records information. Public records information might not be in your credit file at one of the credit bureaus, but it is still available to other sources, including the public. If the information is not in your credit file, then no creditor will see it.

Delinquencies are payments made 30 to 180 days after the due dates. Delinquencies are the same as being late -- they just sound worse. If delinquencies are complete and accurate, they will remain in your credit file for seven years from the date of the late payment. This is true even if you later bring your payments current.

Collection accounts are accounts that have not had any activity for three to six months or longer. If collection accounts are complete and accurate, they will remain in your credit file seven years from the date of the original late payment. Charge-offs are when the creditor writes off the account, instead of turning it over to collections. You are still liable for charge-offs just like collection accounts. If charge-offs are complete and accurate, they will remain in your credit file for seven years from the date of the original late payment.

Since January 1998, all creditors are required to report the date of the first late payment. This starts your seven-year time period ticking.

Collection accounts and charge-offs are the result of an unsecured debt that was not paid as agreed. It is important for you to know that the 1997 Fair Credit Reporting Act states that once the delinquent account becomes a collection account or charge-off, the seven-year period started ticking the day the first payment was late and does not stop for seven years, when the item can come off the credit report.

If you look at section 605 of the Federal Fair Credit Act, it will show you the exact lengths of time that accurate negative items can be reported on your report.
In the past, if the consumer paid any amount toward the collection account or charge-off, the seven-year period started all over again. Now, you can pay off your collection account or charge-off and your seven-year reporting period is still calculated from the day the account was originally late. Once the account goes past delinquent and into collection or charge-off, your seven-year reporting period in your credit file commences from the day your payment was late. This is good for the consumer and creditor. If you continue to pay your account when it becomes delinquent, your seven-year period continues to roll. In other words you are basically still paying as agreed, but not on time. Once your account goes past delinquent, it does not ever go back to just delinquent.

Do not sign a new agreement with the creditor or collector after your account goes past delinquent unless you know exactly what you are signing.

Statutes Of Limitation are another factor which might mean more to you than the seven-year mark in your credit report, which the majority of consumers do not realize when dealing with collection accounts and charge-offs. Creditors and collectors hate it: the statute of limitations in your state for an open-ended account or open account.

An example of an open account is a credit card loan. The statute of limitations is the maximum number of years a creditor has to sue you if your debt goes unpaid. Every day, consumers pay off collection accounts and charge-offs that they do not have to pay off because the statute of limitations has already expired for the open account. Consumers pay off these accounts because the accounts still appear on their credit reports. This is one that tricked me in my youth.

Statute Of Limitations For Debts

The statute of limitations (SOL) for a delinquent debt is the time limit for the creditor to file a lawsuit. This period starts when the debtor becomes delinquent. The fact that the SOL has "run" (expired) on a particular debt will not necessarily prevent a lawsuit from being filed (via a Summons And Complaint), but the defendant can have the suit dismissed on this basis.

The Statute Of Limitations only covers lawsuits, and SOL expiration does not affect other types of collection action or reporting of the account to credit bureaus. The creditor or collection agency may theoretically continue with letters and telephone calls forever (although third-party collectors are subject to the "cease and desist" provision of the Fair Debt Collection Practices Act.) However, they will generally put much less effort into collecting "Out-Of-Statute" debts, and may give up easily. Out-Of-Statute debts can still be reported to credit bureaus for the time limits specified in the Fair Credit Reporting Act. In California oral agreements are 2 years, written contracts are 4 years, promissory notes are 4 years, and open accounts are 4 years.

Statute Of Limitations On Judgments

After a creditor wins a lawsuit against a debtor and is awarded a judgment by the court, there is a time limit for collecting that judgment. However, many states allow judgments to be renewed one or more times, which could substantially extend the enforceability of a judgment, if the creditor is vigilant about the renewals. This can potentially result in a permanent legal obligation until it is paid.  In California there is a 10-year statute of limitations and a maximum 8% interest rate.

Consumers also pay off these accounts when they are not on their credit reports. Even though an account was removed from their credit file, a collector watched their credit report for any activity (actually the computer was watching any credit activity). When the collector spotted the activity, he called the consumer for payment. All the consumer needed to say to the collector was, "I have an absolute defense -- the statute of limitations has expired."

Keep in mind the statute of limitations does not cause your debt to "blow away in the wind" after it expires. If the creditor files suit, the consumer has an absolute defense. The consumer must offer the new evidence to avoid a judgment. The evidence will consist of papers the consumer files to support his claim. If the creditor sues you, and you do not prove to the court that the statute of limitations expired, you will have a lost lawsuit and a judgment against you.

Don't wait for the creditor to sue you. Get the name and address of the collection agency or creditor that owns your collection account. Send a certified letter (return receipt requested) to the collection agency or creditor stating that the statute of limitations has expired for your open account. Ask for a response. This does not mean they cannot sue you, but it will be evidence that you might need to show somebody one day.

Remember, you can sue anybody for anything. If you start rebuilding your credit, you will have activity in your credit file and the collector will be aware that you know when the statute of limitations has expired for the debt or open account. The certified letter might come in handy one day for other reasons. The odds of your being sued for an open account after the statute of limitations expired are slim, but possible. Just knowing the date when the statute of limitations expired can get a monkey off your back.

Depending on what state you live in, if you make a partial payment, you could be postponing the statute of limitations' taking effect on your collection account or charge-off. A collector might call you one day and say you waived your rights when you made a deal with the collection agency. Do not take anything a collector tells you for granted. Make them prove it to you, in or out of court. For about half the population, the statute of limitations started ticking the day they made the last payment for their account.  Your credit report will tell you the date of last activity for your account. You will have your credit report with the date of last activity and a certified letter stating that the statute of limitations expired.

If a debtor files bankruptcy and the creditor lets the statute of limitations expire, the creditor loses the right to make a claim in bankruptcy court. Makes sense, doesn't it? If the creditor does not have an enforceable claim in state court because the statute of limitations has taken effect, then why should the creditor have an enforceable claim in bankruptcy court?

If you have a collection account or charge-off in your credit file that is over seven years old, make the information provider remove it by disputing it with the research request form provided by the credit bureau.

In some cases, you will have a deficiency balance. This is the result of a collateralized loan that was repossessed or foreclosed. As with a repossessed car or foreclosed home, you still owe a debt to the creditor for the difference between what the collateral was sold for and what you owed.

Most collection agencies will sell off their bad debts to other agencies and those agencies will be on your report.  The best way to stop this is to resolve it.  Bad debt will not go away, it will only show up in another form at a later date.

Credit bureaus are not working for you and me. They are working for creditors. It is possible to have a negative item removed from your credit file and still owe the debt. No federal law requires negative information to remain in your credit file for seven to ten years. The federal law states the maximum negative information can remain in your credit file is seven to ten years. If it were up to the creditors and credit bureaus, the negative information would stay in your credit file until the day you went to heaven. You have the right to dispute incomplete and inaccurate information. You are not breaking the law when you dispute information in your credit file. If anybody tells you that you are, the credit bureaus or creditors are financing them. You can also waste a lot of time and effort-disputing information that you know should be in your credit file.

The key word is accurate. You do not have to lie when disputing a negative item. Credit reports are full of errors. If you look closely enough you might find something technically inaccurate about the negative item. You have a right to dispute a negative item that is partially right as long as you believe the negative item is not complete and accurate. A consumer who feels the negative information in the credit file is questionable can also use this technique. "Questionable" usually means a small collection account that is several years old and cannot be identified by the consumer. There are thousands of consumers with small questionable collection accounts.

Some businesses do not keep information as long as the credit bureaus do. Some businesses might find it to be too much trouble to investigate the dispute. Remember, if the credit bureaus cannot verify the disputed information as complete and accurate, they must remove the disputed information. The credit bureaus must meet the 30-day time limit. It is easier to have inaccurate information removed by a smaller creditor because smaller creditors do not retain information as efficiently or as long as a large creditor. Large commercial creditors like big banks retain negative information as long and as efficiently as the credit bureaus do, even though they are not required to.  

Remember, credit bureaus keep negative or positive information for seven years except for Chapter 7, 11 and 12 bankruptcies, which they keep for 10 years.

It costs money to investigate a negative item. When disputing a small collection account or a late payment that is a few years old, the odds are in your favor. You can stretch the agencies' patience by disputing one thing at a time.  I prefer to force them to do everything up front, then continue to challenge them.  They have gotten used to my forms, and every once in a while I enjoy a good letter bout. Just because.  Hey, they get tired of researching the same things too.  When the dust settles you can dispute the remaining derogatory information one at a time.

Keep good records of how long it has been since you initiated the dispute. Do not forget that the 30-day time limit is crucial. Do not use the research request form you received from the credit bureau when disputing items of this nature.

Under the 1997 Fair Credit Reporting Act, you can dispute inaccurate information at one credit bureau. If the information you disputed is modified, the business supplying the information must notify all credit bureaus about the corrected information. If the negative item is not removed from your credit file, try something different: move on to the information provider. You can write to the business that is supplying the credit bureaus with the negative information.  I do suggest sending disputes to the top three.  It takes time to filter these mistakes out and they don't automatically do it for you, despite what the law says.

The business supplying the negative information is the information provider. You can write to the information provider and ask to see the evidence supporting their claim. Make the information provider show you the evidence that supports the negative information you are disputing. The law requires the information to be complete and accurate. Due to several factors, the creditor or collection agency might not be able to supply complete and accurate evidence to support their claim. With all the advanced software and computer technology, human error and laziness still play a role in the negative information being removed.

If the information provider makes any change that affects your dispute, they must inform all nationwide credit bureaus. If the negative information is not removed because the information provider supplied you with complete and accurate information, you can go to the next level and negotiate the account.

Collection accounts refers to charge-offs as well. You do not need a credit repair clinic to negotiate your collection account. Credit repair clinics and collectors will feel you out to see how much money you have, and how much it means for you to have the collection account paid off. Do not tell your personal business to a collector or anyone else trying to collect a debt from you. If you tell them you are paying off the collection account to purchase a specific home that is a giveaway that you are good for the total collection account. Tell them the only reason that you're thinking about paying it off is that you know of collection accounts that were settled for a fraction of the total owed -- if you can settle your collection account for a small percentage of the total owed, then you will settle the collection account. Otherwise, forget about it.

Collection agencies only have a 25% chance of collecting an account that is over a year old. Theoretically, that means if you owe one thousand dollars for the collection account and it is a year old, it is only worth two hundred and fifty dollars today. Keep your negotiations with the collection agency or creditor simple; make them an offer in writing. Tell the collector to take it or leave it, and to please leave you alone. Keep it short and sweet. Being patient is not only a virtue; it is your best negotiating tool. Rarely do debtors or collectors practice patience. This is why you should start negotiating your account as far in advance as possible. You can always raise your offer, but do not raise it too soon. Wait for the collection agency to call you.

If your collection account is still in the hands of the original credit card creditor, or their in-house collection department, you might have a harder time trying to negotiate the collection account. Some of these big banks will not take any less than the amount owed, but will sell your collection account for a discount to an outside collection agency. The big banks will sell your collection account to someone else for a discount, but not to you! Remember that when dealing with debt that can be discharged, it is negotiable debt. I gave you a starting point on negotiating.

Settling a collection account or charge-off occurs when you pay it off. You are no longer liable for the debt. I would never sign anything a collector asks me to sign--I would just agree to pay the charge-off or collection account.

Even though large credit card creditors will work with you when negotiating payment arrangements, large credit card creditors and their in-house collection departments are the hardest to deal with when it comes to settling collection accounts and removing the negative items from your credit report. The way to deal with large credit card creditors after you settle the collection account is a little different. If the creditor did not agree to remove the negative item from your credit file after you settle the collection account, then you can start disputing the negative item directly with the credit bureaus. If you're persistent in your disputes to the credit bureaus, the creditor has no reason to keep the negative item in your credit file, because the account has been settled.

Do not take anybody at his or her word. Conduct all your negotiations through the mail. If they make any promises, you will have evidence in writing to hold the creditor or collector to their word. Make no oral contracts. For example, if the creditor or collector agrees to completely remove the negative item (collection account) from your credit file after you pay it off, get that in writing. You will have a signed and written agreement as evidence to support your claim. If the creditor lollygags around or does not keep his word, you can send copies of your letter to the credit bureaus.

Do not spend any more money on repairing your credit file than you must. You have to ask yourself, "Why are you paying off the collection account or accounts?" Do you need the negative items--like a collection account or charge-off--removed from your credit file? If you have collection accounts, charge-offs and delinquencies in your credit file, then you should "visit the moon." Visiting the moon means having the collection accounts and charge-offs removed from your credit file.

If you have recent positive information in your credit file along with one or two small collection accounts, then having the collection account show "paid collection" or "paid charge-off" will be satisfactory to some creditors, like a mortgage company. In this case, you should shoot for the moon, and if you fall short you can still land on a star. Landing on a star would be to pay off the collection account and still have the negative item appear in your credit file. If your goal is to obtain unsecured debt such as several unsecured credit cards, all negative information will have to be removed from your credit file--including delinquencies. In other words, you are going to have to be the man on the moon. Being the man on the moon is possible, even though I do not care about going there. I repeat: Do not spend any more money than you have to when repairing your credit file.

If you settle your collection account for less money than is actually owed, you could end up incurring federal tax liability. If the difference of what you actually owed minus what you paid off the collection account for is over $600, you should get a 1099 from the creditor or collection agency stating how much you have to add as income on your tax return. Making a deal with your creditors or collectors can cost more money than expected. A consumer asked me: if he filed bankruptcy, would he owe the IRS for discharging his debt? The answer is no, because it is discharged through bankruptcy.

If you filed for bankruptcy or have other unfavorable credit information you want erased, you might receive a sales pitch from a credit repair clinic saying that you will not be able to obtain a loan for ten years. Such information from the credit repair clinic could be misleading (and incorrect).

In some cases, a credit repair clinic will charge you a large fee to tell you to file bankruptcy. Do not let anyone talk you into filing bankruptcy. Do not let anyone talk you out of filing bankruptcy. All the credit repair clinic wants is your money. Some credit repair clinics will guarantee you that they will break the law in order to change your credit identity. Why would you trust anybody with your money that tells you that they will break the law? When you hire someone to break the law for you, you are breaking the law, too.

File segregation occurs when you establish a new credit identity by using a false Social Security number or employer identification number. Employer Identification numbers are assigned by the Internal Revenue Service for businesses. It is a federal crime to misrepresent your Social Security number on a loan or credit application. Credit clinics will talk consumers into using juveniles, foreigners and the client's own children's Social Security numbers. Parents can damage their own children's credit file before they become adults.

I can understand a single parent using one of their several children's Social Security number to have the utilities turned on if the single parents' credit file was damaged due to divorce or other circumstances and they cannot afford the large deposit required by some utility companies. When a customer's credit report is bad, some utility companies require a large deposit before the service is turned on. The single mother must provide for herself and the children any way she can.

File segregation is promoted by credit clinics, classified ads and all over the Internet. I know of individuals who had bankruptcy in their credit file and used file segregation for a new credit identity. These individuals ended up in the same situation as when started. It did not take them as long, and it was worse the second time. Not only did they cheat creditors out of money, they started conning money out of anyone that was gullible. These file segregation individuals would have been better off to re-establish credit after bankruptcy. When you break the law the first time, it becomes easier to break the law a second time, and it just gets worse from there. People use file segregation to hide identity as well as property from creditors and collectors. File segregation might bring short-term capital but can also bring long-term consequences that are not in your favor. I am not speaking for everyone in writing about file segregation. I am speaking only from my experience.

Some companies in business for over ten years will sell file segregation for one hundred and fifty dollars. The loopholes such companies work through are beyond the scope of this publication. The credit repair clinic is sending you the information to break a federal law. Even if you filed your new Employer Identification number under a "Sub-Chapter S Corp," at some point the credit bureaus will red flag your credit file.

If you have filed bankruptcy recently, you might be a target for the segregation promotion. I promise you that it is a lot easier to re-establish credit after bankruptcy than credit clinics tell you (and than the public realizes). An individual would want to use file segregation only if he intends to break the law, not only by using file segregation, but also for other illegal activities associated with it.

If you finance a home, you do not want to put a Social Security number that is not yours on the mortgage account.

Everybody has a right to a second chance. Do it legally.

If you are not pleased with the credit bureau's service, you should complain to the attorney general's office in your state. The Federal Trade Commission is swamped with complaints from consumers. You might not hear from the Federal Trade Commission until a new law is enacted.

You can complain to the Federal Trade Commission by making a simple phone call. It is well worth doing if you have a legitimate beef.

Remember, the credit agencies' worst enemy is someone who knows their rights!