What You Need To Know About Collections

When I discuss credit report collections with my buyers, they are often confused by them.  Sometimes they were not aware that they existed at all.  Other times, they knew they were there but they're shocked that they're still reporting, often after many many years. 

Given the global confusion about collections, I thought I'd share a little information about how collections work and the timelines related to them.

Statute Of Limitations

There are two timelines to be aware of in terms of collections:  The credit reporting time limits and the state's statute of limitations. 

The statute of limitations is the time limit during which a creditor can sue someone for a debt.  The limit varies depending on the state and the type of debt in question.  For debts with written contracts or promissory notes attached, it's 10 years in Indiana.  For oral contracts or open ended accounts (credit cards, phone contracts, etc.), the limit is 6 years.

This statute only says that a creditor can no longer use the courts to force you to pay a debt after that window.  Here's what the statute of limitations does not do:

• Keep a collector from filing a lawsuit against you anyhow - sadly, a creditor can still file a lawsuit.  You can use the statute as a basis to win that suit, but they could still bring you to court or, more likely, threaten to in the hopes of collecting from you.
• Erase the debt - the debt doesn't go away after this window expires.  They just aren't supposed to sue you beyond that, but you still owe the money and they can still try to collect.
• Stop credit reporting - this is where collections impact most people.  These often show up on the credit report and are factored into the credit score.  The statute of limitations doesn't stop a creditor from reporting the debt against you to the credit bureaus.

One important thing to know - you can reset the clock on the statute of limitations without being aware of it.  Simple things like agreeing to make a payment or even acknowledging that the debt is yours can restart that six or ten year window.  Given this, it's wise to be VERY cautious when talking to a creditor and volunteer nothing about the debt in question. 

Credit Reporting Time Limit

While it's good to know about the statute of limitations, what home buyers really need to understand is the rules for credit reporting time.  How a creditor reports your debt to the credit bureaus is what will impact your score and your ability to get a mortgage.

Here's the good news.  Creditors can only keep information about a delinquency, collection or charge off on your credit report for 7 years from the original default date.  They can not sell it or play other sneaky games to 're-age' the debt.  You can admit that it's yours all you want and it won't mess things up.  The law says that it can stay on your report seven years only.

That being said, creditors can do a lot of unpleasant things to mess up your score in those seven years.  A popular tactic recently has been to report old collections as if they are currently past due.  A person may have stopped paying AT&T in 2009 but AT&T (or, more typically, the collection agency that they sold it to) is reporting it as if it is a current bill that is past due right now.

Because the credit scoring model places higher weight on recent activity, these 'recent late payments' on an old debt can really pull down your credit score.  That's exactly why the creditors are doing it. They want to put pressure on you in hopes that you will pay them to make it go away and improve your credit score.

What You Should Do

Home buyers often ask me what they should do in situations like this.  Normally, my answer is 'Pay them.'  If you have open collections and an ability to pay them off, you should.  Even if a creditor is playing nice right now, there's no guarantee that they won't start reporting you as late down the road. The best way to keep them from doing something to pull down your score is to pay off the debt and be done with it once and for all.

If the creditor isn't reporting recent activity though and the debt is over five years old, sometimes it's wise to let it slowly fade away.  Paying it now could actually pull your score down temporarily because it would show as a recent activity on a collection account. 

The problem with leaving it alone, though, is that it's a gamble.  There is no guarantee that the creditor won't start getting creative once their time limit gets close to running out.

Really, the best route is to sit down with someone who has a strong working knowledge of credit scoring and can review your situation with you.  Together, you can work out a plan to handle the collections and get you in the right place to buy a home.  Do you think that you don't know anyone who understands credit reporting?  Sure you do (hint - it's me). 

Give me a call or drop me an e-mail.  We'll get a plan in place to get you into your home as soon as possible!



Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.