Credit Report and Collection Agency

Anonymous · ‎10-21-2010

If the original lender submitted their report to the credit bureau as "Legally Paid in Full for Less than Full Balance", and then they charge it off and send it to a collection agency, that doesn't make any sense?

How could a loan be "LEGALLY" PAID IN FULL then charged-off to collections? It's an oxymoron.

Yet, if the collection agency comes after me, as they are doing, they now have the right to report to the bureaus as well?....So now what, CA reports one thing while the original lender reports another?

Paid in Full means just that...the fact that it also states For Less than Full Balance means nothing except appearing as a blemish.

Can anyone with experience with this elaborate?......Thanks!

fused · ‎10-21-2010

Do you have anything in writing from the original creditor that clearly states the debt has been satisfied and you no longer owe anything?

mompreneur1 · ‎10-21-2010

May I ask how in the world did you get your CS from 500 to the 800s?!? Please share as I am on a journey to improve my CS now and any tips will help at this point.Thanks!

RobertEG · ‎10-21-2010

Interesting question. I have never seen an OC report a charge-off after debt settlement.

I wont offer an opinion on the legality of doing this, just some points that jump to mind.

When you have unpaid debt with an OC, they are carrying that on their accounting books as an asset. They can remove this as an asset by “charging-off” the amount of the unpaid debt, and thus reducing their tax obligation.

If you enter into a settlement agreement with the OC to pay less than the full amount of the debt, that of course eliminates your further obligation to make additional payments.

They did not say the debt was "paid in full," they said that you paid less than the full amount, and that is considered as full obligation on your part to pay any additional amount on the debt. They would then report the debt owed to them by you as $0. That does not mean full debt was paid and your CR still reflects that distinction by way of status code on the account sayying "paid for less than the full amount," and not "paid in full."

But where does that leave the OC? They still have the full debt due as an asset in their accounting ledger, and did not receive full payment of that asset. So the difference would still be an asset in their books. To mitigate the impact on them, it would appear that they could report this difference to IRS as bad debt, and remove it as a continuing asset. That is a “charge-off.”

So that leads to the ultimate issue. Can or should they report this charge-off to your CR?

I see no provision of statute or rule that would prevent it, but it is certainly a nasty thing to do. They usually report charge-offs prior to payment or settlement of debt in order to put pressure on the consumer to pay. But after they no longer are holding you to obligation to pay anything else on the debt, there is not benefit to them to also report it to your CR. Why would they do that?

Again, I have no opinion. Just questions. I dont think the answer is black and white. Maybe someone else will jump in with some points of law.

AndySoCal · ‎10-21-2010

Is the balance being reported as zero on this account ? What was the status of the account before you settled it ?

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Anonymous · ‎10-22-2010

The bank reported it "Legally Paid in Full"....the fact that the rest reads "for Less then Full Balance", according to what I've read and understand means just that. The bank has accepted less than the full amount due as "legally paid in full".

The status of the account was such....it was a short sale and it was never late. My credit score never changed as there are no late payments on the account, simply a notation stating "Legally Paid in Full for Less than Full Balance". This was reported 3 months ago and my credit report is still well over 700.

Probelems are multiple here as they assigned this to some scavanger collection company, Oxford Mgt., and Oxford called me two weeks ago for the first time (closed 3/10). Demanded they fax me a copy of the letter they say they mailed me. I was told that I would have it tomorrow and that was two weeks ago. Since then, I send them a DV letter.

RobertEG · ‎10-23-2010

Yes, I agree, you no longer "legally" owe anything on the debt. But IRS still wants to collect taxes on this total asset.

Unpaid debt with a creditor is an asset in their accounting files, which the IRS will consider a taxable asset.

IRS is not impressed by personal agreements as eliminating tax obligation.

IRS will initially look at the credtior as having an asset in the form of the unpaid total debt. The credtior, if they enter into an agreement to settle for less than the full amount, means they get a partial cash payment against this asset (for which IRS will impose taxes on the credtior)t, but someone is still is obligated to IRS for taxes on the remaing portion of that asset. So the credtior "charges-off" the unpaid portion of this former asset, thus remvoing it from an asset on their books, and reducing their tax obligation.

So how does IRS get taxes on the difference between the amount of the original debt and the amount of the settlement?

If that amount is $600 or more, they come to you through the 1009C process and collect it from you.

Anonymous · ‎10-25-2010

I undertand that the 1099C is forthcoming if they "forgive" me for the debt. That's not my problem....my problem is: Will I get the 1099C now that this is in the hands of these scavangers.

Anonymous · ‎11-11-2010

The amount was reported as 0. Before the short sale closed, there was no lateness, no 30 days.

All 3 bureaus show the account closed with either a Pays as agreed or Paid in Full for less than full balance.

None of the 3 bureaus show a collection amount nor the word settled or collection.

RobertEG · ‎11-11-2010

A 1099c is not a "forgiving" of the debt by anyone. It is just the opposite.

Your credtitors may have forgiven, in whatever private obligations struck with them, your future obligations, and recorded that in their credit reporting as $0.

But IRS does not. They sort through the trail of the entire debt. They see who has paid and received what.

Any settlement for less leaves one party obligation to payment of taxes on the unpaid portion of the debt

How a CRA records future debt status, and thus credit reporting, is not an IRS issue that excuses tax obligation on that asset.

If the difference between the obligated debt and the settled payment was at least $600. the CA is requried, under federal law, to report this to the IRS. It is not discretionary. You are issued a 1099c, and IRS taxes you on that amount.