Old collection and FHA loan

[Anonymous]

Hi everyone,

I just went under contract on a home this weekend, and have been prequalified (they did pull my credit for that) for an FHA mortgage. Most of my credit is pretty straight forward, but the loan officer and I discussed one issue.

In 2013, an old landlord sent me to collection for $3,500. At least, the invoice he sent me was $3,500. However, the collection agency reported it as $9,500 and it has since grown to $16,500. It is due to fall off my report next year, but I need to buy this year due to rising prices. 

Since the collection is so large, I have to do something about it. My debt outside of student loans is non-existant, but because I have six figure student loan debt, my DTI is tight (since they attribute 1% of my total balance even though that's about 4 times my actual payment). This means that I can't qualify for the amount I need if that collection is still there at the 16k since that attributed 5% would kill my DTI. 

This is a new build so closing won't be until early November. So I do have some time to resolve it. What is the best approach for an old, inaccurate collection? I HAVE tried to dispute it in the past since I have the original invoice, but got nowhere with that. I think I'm going to have to deal with the creditor but before I reach out to them I want to make sure I know the best option. Is it trying to negotiate a settlement? Setting up a payment plan? I'm pretty willing to do whatever it takes, but because the amount was reported so wrong paying it off simply isn't an option. I could pay off the original amount, though.

Thoughts?

[dynamicvb]

What is the statute of limitations in your state? My guess is this is outside of it now so they can't sue. I would offer to settle for less than the 3500, 40% or so in exchange for them deleting it from your credit. Don't' mention anything about needing it for a mortgage as they will be less likely to deal. Get everything in writing if they do agree to delete in exchange for payment.

[Anonymous]

Oh wow. You’re right, there’s a 6 year SOL in my state. It was assigned to collection 6 years ago in July, but the debt itself was incurred a few months earlier.

Just to be safe, it sounds like I should wait until July before I do anything, then try to settle.

[RobertEG]

If you settle for less, you must also consider that the difference will be considered as income by the IRS if $600 or more.

To avoid a settlement for less that could result in tax obligation, if you get the amount of the actual debt reduced before paying, then you can avoid a settlement that may result in tax obligation.

You may wish to formally get agreement that the actual debt that is being asserted by the debt collector is actually lower prior to settling of paying the debt, thus avoiding potential taxes on the difference between the actual debt and amount paid in settlment for less.

[Anonymous]

Who legally owns the debt? Once the SOL runs out, if the landlord still owns it and hasn’t sold it to the collection agency, maybe you can make a deal with him/her to pay to delete. If they still own the debt I’m sure they’d be thrilled to get anything at this point! You’d just have to get it in writing that they will recall the collection agency’s authority and make sure it gets deleted.

Also, i’d see if there are limits on the fees and interest a collection agency can add. Each state has their own rules on this. The fees seem so excessive!

[Anonymous]

I'm pretty sure that the collection agency owns the debt. They've literally never attempted to collect on it whatsoever, which is kind of nuts, but appreciated I guess! 

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@Anonymous wrote:
Who legally owns the debt? Once the SOL runs out, if the landlord still owns it and hasn’t sold it to the collection agency, maybe you can make a deal with him/her to pay to delete. If they still own the debt I’m sure they’d be thrilled to get anything at this point! You’d just have to get it in writing that they will recall the collection agency’s authority and make sure it gets deleted.

Also, i’d see if there are limits on the fees and interest a collection agency can add. Each state has their own rules on this. The fees seem so excessive!

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