Can inaccurate credit reports be corrected?

Yes, they can.  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (FACTA), allows the consumer to question accuracy of reports, and furnish proofs to be considered in making corrections.  Several years ago, I taught a seminar just after a change in the law.  You can examine those seminar materials here:  Fair Credit Reporting and mortgage reporting, bky issues .  If you want to read the law yourself, you can access it here:  FCRA as amended by FACTA

In essence, those rules provide that you have the right to one free report each year, and you can apply for that report from each of the three credit reporting agencies (CRAs): Experian, Equifax, and TransUnion.  If you would like the form to use, you will find it here:  Annual Credit Report Request Form .  If you are turned down for a loan, you can get the credit report which was used to evaluate your credit, and it is also at no cost.

In order to dispute inaccurate (including incomplete) credit entries, you must contact the CRA with information showing the inaccuracy, and they have 30 days to investigate.  Hopefully, they will make the correction with no further effort on your part.

Review my attached writing to consider all the myriad ways a credit report can get inaccurate.  Frankly, it is amazing we have accurate reports.  A number of years ago, it was estimated that 40% of the reports have errors which will lead to denial of credit, and 80% of reports have errors in general.  With that in mind, looking at your report once a year is a good idea.

One common area of inaccuracy is the listing of debt discharged in  bankruptcy.  Often, the report is not updated after bankruptcy.  Even though debt is washed out in bankruptcy, the credit report is silent as to that issue, giving the impression that the debt is still owed!  Thus, it is always wise to review the credit report 6 months after a bankruptcy discharge.  If you continue to pay on debt after a bankruptcy, the creditor must continue to report your payments after bankruptcy, in order for the report to be accurate.

Why do credit counselors insist on bloated debt payments in consumer budgets?

So often, people come into my office to talk about debt, after talking to a “consumer credit counselor”.  The counselor has recommended a budget to them, lean on basics but heavy on consumer debt payments.  After a few months, the budget collapses under the strain of unrealistic expectations.  Why are these “counselors” so unrealistic about budgets?

This entire industry was studied in a Senate Report in 2005.  The title of that report is: “Profiteering in a non-profit industry: abusive practices in credit counseling”.  The U.S. Senate Homeland Security Committee was up in arms over “the marketing of debt management plans”, and the practices of the industry as a whole were examined.  See the Senate Report:   Credit Counseling, Senate report.

That report reviews that “credit counseling” was first started and funded by credit card companies in the mid-60s to stem losses from customers who did not pay.  The theory was that a “kinder, gentler” collector might increase yields for credit card lenders.  By encouraging the consumer to “tighten his belt” and use the lender’s “counseling service” to collect monies for credit card and debt payments, more money could be collected.

Of course, referrals to any third party source of information, such as attorneys, are actively discouraged, (which I’ve found in my experience).  The lender doesn’t want his collection agent to lose control over the consumer’s cash flow.

The arrangement is quite cozy.  The consumer is charged an extremely modest amount for the “credit counseling” service, say $15 per month.  Of course, the goal is not to raise funds from consumer fees.  The goal is to get as much of the consumer’s income as possible, for debt payments.  Modest changes in interest rate and payment are made with some lenders who use the collection service, other lenders refuse to alter any payment terms but will still pay the “counseling service” for collecting payments for them.  All the while, the consumer is told that this collection agent is “in his corner”.

And this is the key:  As long as the debtor doesn’t know that the credit counselor is actually a collector working on a percentage, then any payment plan seems to make sense.  But what the counselor rarely reveals, and the consumer who trusts his counselor doesn’t know:  the counselor is a collector working on commission, to be paid a percentage of what he collects.  Lenders who pay these collection fees understand that this is just another business expense, a cost of collection.  Why lower interest rates or payments? The more the counselor/collector collects, the bigger the payoff for all.

What are the percentage fees collected as a kickback?  See on page 33 of the report, footnote 164:  up to 30% of the monies collected is the kickback.  At this rate, everybody makes money…except the consumer.

It is no stretch of the imagination to believe that lenders have controlled the “credit counselors” they fund, and that they have done it for years.  See footnote 166:  “Some creditors also began issuing more detailed…standards, in effect becoming a regulator of credit counseling practices”.  Clearly, with the majority of credit counseling monies coming from lenders, this is an industry that has been “bought and paid for”.  Footnote 177 makes it clear that the credit counselor get the majority of his revenue from kickbacks, and is “obligated to comply with creditor standards”.

Wisely, the Senate Report insists in its’ last page on full disclosure of the “existence and nature of any financial relationship with a creditor of the consumer”.  Armed with information on kickbacks, any consumer would be well advised to steer clear of the conflicted consumer credit collector who portrays himself as a counselor.

Are collectors obliged to be polite?

From time to time, we get questions about the Fair Debt Collection Practices Act, and so I have posted it to this blog entry.  In essence, this federal law protects the consumer from harsh and abusive collection practices, allowing him/her to discuss debt issues without being threatened, harassed or humiliated.

This brief outline is hoped to be, for most consumers, a sufficient summary of the most relevant points.  Please bear in mind that I have not covered all of the law in its context; I am merely suggesting answers and statutory references for the questions I am most frequently asked in my practice.  For your reference, I have placed a highlighted copy of the statute here: Fair Debt Collection Practices Act

The first thing to remember is that only the debt collector is regulated.  The full time employee of a creditor does not have to pay attention to this set of restrictions.  See Section 803(6).

Collectors must call during normal hours, 8am to 9pm.  In addition, they may not call a consumer when they know he is represented by an attorney, or at the consumer’s place of business when such calls are prohibited.  See Section 805(a).

Further, all communication must cease if the consumer writes the collector, unless the communication is to notify the consumer of an impending lawsuit.  See Section 805(c).  These measures allow common sense structure to the phone contact with the consumer.  This is, in my opinion, good for everyone.

Certain obviously deceptive practices are forbidden, such as threats of violence, profanity, repeated calls to harass, and the failure to identify oneself.  See Section 806.

In addition, false and misleading representations are banned. Among those commonly  used statements are: exaggerating the amount or status of a debt, misrepresenting oneself as an attorney, threatening arrest, threatening a false credit report, or any other “deceptive means of collection”.  All of these misstatements are violations of the law.  See Section 807.

The collector cannot collect more than is owed, per Section 808.  The same section also puts some restrictions on postdated checks.  Read that section to become more acquainted with your rights.

Damages under the statute at Section 813 are realistically limited to $1,000 per occurrence plus attorney fees.  And the collector who can prove an innocent mistake will be absolved of fault, with no damages awarded to the consumer.  Nevertheless, this federal statute places significant limits on the abusive collector, who now must “mind his manners”.

Does this automatically curb all collection abuses?  Of course not.  But a polite reminder that you are aware of the statute will often lead to a more civil conversation.  A more polite conversation is often a more productive one.  Ultimately, this is often the best way to save time and money for all parties concerned.

Does Debt Settlement really work?

Lately, I have done a fair amount of lecturing to CPAs and others about debt settlement, illustrating the techniques used for handling debt with this bankruptcy alternative.  For a description of the relative advantages in comparison t0 Chapter 13 bankruptcy, I have composed a summary:Chapter 13 compared to Debt Settlement.

Of course, some will worry about tax issues in debt settlement, as well they should.  The good news is that an insolvent debtor can escape taxation on debt forgiveness, using the IRS insolvency rules.  Want to calculate if you qualify?  Use the Insolvency Worksheet.

If you are a professional who wants the best information, I would suggest IRS Pub 4681 , which details the rules in depth.  Also, the IRS website on this topic is useful:  Debt Forgiveness IRS websites .  In any event, those loaded up with consumer debt should consider debt settlement as a useful alternative to Chapter 13 bankruptcy, or other debt workout alternatives.