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Bad Debt
Not every negative entry or comment on your credit report is a bad debt. The term refers to a specific kind of debt, one that has gone through all of the correction, collections and customer service steps that a lender uses to determine whether a debt is collectable.
When an account – an auto loan, mortgage, credit card balance, etc. – gets to the point that the lender believes it cannot be collected, then it becomes a bad debt. Most of the time, these kinds of debts are sold for a fraction of their stated dollar value to collection firms that are experts at collecting debts that others cannot.
Lenders are different
All lenders are a little different, but generally speaking they will work with consumers who are having temporary money troubles. Interest rates can be reduced, payment terms extended and other fees waived or limited so that the debt is more easily discharged by a struggling consumer. For most lenders it makes more sense to do this than to write off the amount as a bad debt right away.
This means that the consumer will move through a certain number of steps with each creditor before any bad debt is sold to a third party. The consumer will have a chance to work with the original lender’s collections department to establish a repayment plan, and prevent the negative
that are generated by bad debt filings.
The principles are the same
Whatever operational differences there are among lenders as they work with their problem account, the principles of good money management remain the same – and this is what negotiated repayment plans are based on. In other words, you, the consumer who is getting behind, need to update the creditor on your employment, earnings, other debts and so forth so that a realistic plan can be developed to prevent the creation of a bad debt.
The main thing to remember is that honesty will get you a lot farther than telling the creditors what they want to hear. In the last analysis, it pays them to work something out with you if you can stick to the new repayment schedule. They will lose between 70 and 90 percent of the account balance if they sell it as bad debt to a collection firm. This is not good for anyone, the lender or the consumer.
Planning prevents poor performance
As with most everything else in life, planning prevents poor performance. When it comes to managing debt, and keeping bad debt from mounting up, it’s not just the planning, but discharging the plan, that will make things right. When creditors extend themselves to work with you, you have to do the same, so don’t make extravagant promises. Just be honest about what you can do, and most of the time creditors will work with you.
A bad debt is the worst thing you can have on your credit report. A bankruptcy notice is essentially one, big bad debt notice – signifying that all your debts went bad. A single one is just as serious if you intend to keep as good a credit report, and three-digit credit score, as possible. Check other articles here on “
” and “Credit Report” to get more information on handling your debt – and handling how your debt is reported to the world, too.
Topics: Debt Consolidation |
