If you fall behind in your credit card payments, your original creditor will usually charge off your debt after about six months. You still owe the amount of a charged-off debt, but your creditor gets a tax benefit for the debt it considers uncollectible. At that point, a collection agency often buys your debt for pennies on the dollar. If the collection agency can't get you to pay, it might resell your debt to a second collection agency.
When a second collection agency takes over your debt, it will usually send you a collection notice. The notice will include the name of the agency, the amount you owe and a payment address. The Fair Credit Practices Act requires that notice contain language indicating it is an attempt to collect a debt. If you believe the debt is invalid, you can dispute it in writing within 30 days of the notice. By the time your debt reaches a second collection agency, the amount might be incorrect or artificially inflated. It's often a good idea to have the agency validate the debt and prove that the amount is accurate.
Whenever a new agency takes over your debt, you'll see a new entry on your credit report. Your original creditor and the first collection agency will remain on your report and will not be replaced by the new agency. However, both accounts will be removed at the same time after seven years from the original account delinquency.
According to Experian, the credit reporting agency, a collections account is almost as bad for your credit score as a bankruptcy. Adding another collections account to your credit report will likely hurt your score. However, it won't be as dramatic as the damage done by your first default with your original creditor. According to the Fair Isaac Corp., creators of the FICO credit score, there isn't a large difference between moderate and severe delinquencies.
The timing and likelihood of a lawsuit from a creditor depends on a number of factors. Generally, a creditor will sue if the amount you owe is substantial, or if there is some indication that you have the means to pay off your debt. Some agencies are simply more willing to risk the cost of a lawsuit than others. If the second collection agency decides to sue, you will have to respond to the lawsuit in court or risk a default judgment. Once a creditor gets a judgment against you, the creditor has the right to pursue more direct collections actions, such as wage garnishment or bank account levies.
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