Many folks are unaware of collection accounts until they get prequalified for mortgage financing and the mortgage professional runs an updated credit report. Lo and behold don’t there appear a collection account or two of which the client may not have been aware. Those accounts will need to be settled (paid) in order to qualify for mortgage financing. Even in the instances where you may be aware of a collection account prior to prequalifying for a mortgage loan, the following information should be useful.
There are basic steps to settling a collection account which—based upon my long experience as a mortgage professional—can provide rapid and satisfactory results. These instructions I am providing are based upon my observations of clients who have either already attempted to pay off open collection accounts or, as part of the mortgage qualifying process, make settlement arrangements. I’ve watched the successful attempts and the failures.
Step 1: Verify the Creditor. Collection agencies purchase open collection accounts from your original creditor for pennies on the dollar. That means that an account with a major retailer such as Sears of which you owe $665.00 would be purchased by an outside collections agency for, say, $150.00. Better Sears receives some money rather than none and then writes the entire debt off their books. When the Collection Agency collects the debt from the consumer, anything they collect above $150.00 is profit.
But Collection Agencies sell of their debt, too. It’ s not unusual to see a collection debt having been “sold” from the original creditor to Collection Agency “A” and then that agency sells it to Collection Agency “B.” You will need to verify who the original Creditor was and the true balance due. The balance due can change over time as collection agents add late fees and interest.
Step 2: Prepare for Contacting the collection agency. Before you pick up the phone to make the call and settle the account you need to have a few things prepared in advance. First, the money. If you are going to negotiate a settlement for less than the full amount owed, or even to pay the balance in full, you’ll need the money at hand. The collection agent doesn’t really want to hear how you plan to pay them at some unknown future date.
If, for example, you have an idea the collection account balance is roughly $470.00 then you should have at least that much disposable cash on hand to make immediate payment once you speak to the collection agency.
Next, you’ll need access to a fax machine. Part of my recommended process includes the collection agency sending you both a confirmation of agreed upon settlement terms (before you pay) and the final satisfaction of the debt in writing. You want to have immediate access to both letters from the collection agency for your protection both before and after you make the payment.
Finally, you must know the method of payment you’ll make. Are you considering mailing a check? Do you know how to do a “check by phone?” What about using a credit card, do you have one with sufficient balance available to settle this account? If you are planning on sending the money via Western Union, have you researched how and where you will do that?
It doesn’t make sense to go through all the trouble of contacting the collection agency, receiving confirmation in writing of the balance due to permanently settle the account and then you can’t send the money for another week or so. You’ll want to send the money immediately so be prepared for that.
Step 3: Make the call. Adopt a polite but firm speaking tone when you make your call. The representative of the collection agency is not your friend; neither is he your enemy. You never need to get nasty or to raise your voice. You don’t need to get into the “how this happened” or explain ANYTHING. You are simply calling to make a business arrangement: payoff a debt you owe.
I think it smart to keep a pen and paper at hand and immediately jot down the person’s name; use the name throughout your conversation. “Good afternoon James, I am calling because I discovered this collection account and I want to immediately settle this matter.”
Now, you must keep in mind it is James’ job to get the maximum amount possible on this account. Remember, the collection agency probably did not pay in full for this account when they purchased it from the original creditor (or the previous collection agency). If James begins quoting a number that is substantially higher than that indicated by your research, then you need to work that number down to what you are prepared to pay. Keep it civil, and keep it calm: “I’m afraid that number is substantially higher than I was planning to pay. The balance with the original creditor was $400, my research indicated I might have to pay you $470 today for late fees and interest. I’m not prepared to pay $600.” When James tries to get that higher amount, stand your ground and remind him you are ready to send the money TODAY once you have confirmation from him in writing of the amount needed to permanently settle the account.
If you find you are getting nowhere with the first representative you speak with, don’t hangup. Simply ask to speak to that person’s supervisor. I find it’s useful to say something like, “I”m sorry James, it appears you are not in a position to help me with this account today. May I please speak with your supervisor?” He may try to keep you on the line and get that $600 out of you, but, when all is said and done, if you stand your ground you will ultimately get a supervisor on the phone. If that doesn’t work, ask for that person’s supervisor. You must “climb the ladder” if that’s what it takes to get this thing done and paid NOW. Keep reminding the people you are speaking to that you are ready, willing and able to make payment TODAY. Believe it or not, that holds a lot of weight when speaking with a collection agency.
Once you and the representative (or the rep’s supervisor’s supervisor!) have worked out the final number and your method of payment you will ask for written confirmation BEFORE you send off any money.
I once had a client settle two collection accounts for his daughters’ cellphone bills. He made the call, followed my instructions and got his payment in the same day. But he neglected to get a written confirmation that his payment would permanently settle the account. We discovered about a month later that the creditor maintained a balance due for the difference between what he had paid and what they felt was due.
GET WRITTEN CONFIRMATION OF THE SETTLEMENT AMOUNT BEFORE SENDING PAYMENT. This written confirmation should also indicate that you will permanently settle this collection account, no balance will be due, the amount of the settlement, and that your account with this collection agency will be closed. And you want this written confirmation on the collection agency’s letterhead, signed by the representative (or appropriate party at the collection agency) and dated. Email confirmation is NOT acceptable. Further, do not accept a letter if it doesn’t indicate all of the above terms and if it isn’t signed and dated.
Once you receive this written confirmation you must get your payment out immediately as per the terms of your agreement. Otherwise you’ll have lost any negotiating credibility with this agency and your phone will begin ringing off the hook as the collection agency attempts to collect the debt.
After you have received payment, I think it important that you make a follow up call to your representative at the collection agency. The purpose of the call is twofold. First, verify they have received payment. Second, request your written satisfaction of payment letter. As with the terms of agreement letter, your satisfaction letter should be on the collection agency letterhead, dated, signed by the appropriate representative and indicate clearly that your debt is permanently settled, no further action will be taken and that the collection agency will notify the three credit bureaus that your account is paid and closed.
This last part seems like it should be automatic, but don’t be so sure. I have seen many collection accounts settled and not updated on a consumer’s credit report as paid and closed. Be sure this is in your final satisfaction letter.
There you have it. Instruction as detailed and yet as simple as I can provide for you based on my observations of many, many clients attempting to accomplish the same goal as you: payoff a collection account and get qualified for a mortgage loan.
More information about your rights when dealing with collection agencies HERE provided by the Federal Trade Commission
Hope that helps!strong>