Editorial Policy

Credit counseling often is usually only for card debt

Erica Sandberg

March 10, 2016

Q Hi Erica,
I went to a credit counseling place in San Diego for advice on what to do with my bills that had gone to collections. The lady at the office pulled my credit report to add up what I owed, but then she said that the agency can’t let me pay off my debts through them because my bills are in collection!

To explain my side: It is $6,000 in bills that piled up from a car accident from when I had no insurance. I could not afford to pay the mound of bills that kept growing every single month. I could not pay with my credit card at the time because it had only a $500 limit. That was six years ago. Today I still get bills and lots of calls, but I still can’t pay all that I owe. Is there no one who can help me?  — Carl

A Dear Carl,
I’m sorry you had a disappointing experience with the credit counseling agency. These nonprofit organizations are set up to assist people with financial problems, and in general they provide a great service. A certified credit counselor reviews a client’s entire financial circumstances, asking about assets, liabilities, cash flow and what the client hopes to gain from the session. After all that is out in the open, the counselor will develop an action plan based on the person’s goals and situation.

At the end of the session, a debt management plan may be introduced as a way for indebted individuals to manage their obligations. The client sends one fixed payment per month to the agency, which then distributes the funds equitably. Many creditors agree to reduce the interest rates for those on a repayment plan.

Unfortunately for you, this type of debt repayment plan is typically reserved for credit card debt. Collection accounts are not usually included. Why? Because a repayment plan typically is spread out over a three- to five–year period, and collection agencies tend to want all the money at once. Some will accept very short-term repayment plans in which the debtor pays the account off in a few installments, but that’s about it.

You can try to set up such a do-it-yourself debt plan with the creditors or even hire a service, but you may want to wait it out. You’re in California, so the four-year statute of limitations for being sued for a debt has already run out. What you don’t want to do is restart the clock. If you make a payment or even tell the collector that you will, the statute time frame begins again, and you can be taken to court if you don’t follow through on your promise.

Also, the collection accounts should fall off your credit reports soon. This kind of negative data can be listed on your file for only seven years. That means that in about a year, you’ll be in the clear!

This is all information your credit counselor should have told you, and I’m surprised that she didn’t because it’s so empowering. Outside of the damage the collection bills are doing to your credit rating (which should be fairly minor now, considering the age of the accounts), you shouldn’t be afraid of anything.

A month after the collection accounts turn 7 years old, pull your credit reports from annualcreditreport.com to make sure the accounts in collections are nowhere to be found. If they are, reach out to one of the credit reporting agencies — TransUnion, Experian and Equifax — and explain that those time-bound collection accounts can no longer be listed on your reports. The accounts will be removed from your reports at all three credit reporting agencies.

After that, I suggest adding positive credit activity to your credit reports. You don’t mention having a credit card now, but if you do, use it responsibly. Pay the bill on time and in full. Simple. If you don’t have a card, consider applying for a secured card. As long as you have a job, secured cards are easy to qualify for because the cash deposit guarantees the account.

I hope I helped!

Got a question for Erica? Send her an email.

Tags: , , , , , ,