Debt Settlement and the Fair Credit Reporting Act

If you're considering debt settlement as a solution to your financial problems, it's helpful to understand the Fair Credit Reporting Act (FCRA). This law protects your rights regarding credit reporting and helps ensure the accuracy and fairness of the information in your credit reports.

When a debt is resolved through a negotiated settlement, creditors are supposed to report the account as "settled" or "paid at less than full balance."

But what happens when they don't?

Today we'll explore the FCRA, learn how to dispute an error on your credit report, and what to do if they keep reporting a settled debt. With an understanding the FCRA, you can be aware of your consumer rights and minimize any potential damage to your credit rating.

What is the Fair Credit Reporting Act (FCRA)?

The Fair Credit Reporting Act (FCRA) was established and is enforced by the Federal Trade Commission (FTC). The Fair Credit Reporting Act is one of several sets of consumer protection laws outlined in the Federal Consumer Credit Protection Act, which spans back to 1968. This particular consumer protection law regulates how the information in your credit report is used, as well as who can access it. Under the FCRA, creditors must have a legitimate business reason for reviewing your credit report, such as if you've applied for a loan or insurance. Employers and potential employers are not allowed to access your credit report without written permission.

Getting Your Credit Report

You are also entitled to see your own credit report anytime you want directly from the credit reporting agencies. The three major credit bureaus (TransUnion, Experian and Equifax) created annualcreditreport.com, allowing you to get one free report from each of the credit bureaus regardless of whether you've had negative action taken against you or not.

How the Fair Credit Reporting Act Helps Consumers in Debt

The FCRA helps consumers by protecting them from inaccurate or misleading information in their credit reports. It also protects you from employers and creditors who may discriminate against you based on your credit history. And if errors are found, the FCRA gives you the right to dispute them with the credit reporting agencies.

It's easy to take these things for granted, but without these protections, negative remarks on a credit report could be unfairly damaging and hold consumers hostage.

Debt Settlement and Credit Reports

When it comes to accounts that are negotiated or settled, creditors must report the account as "settled," or "settled for less than full balance," or something similar indicating the settlement. The remark remains on your credit report for seven years from when you initially fell behind. After the seven-year period, most negative information is removed from your credit report. However, some judgments, tax liens, bankruptcies, and other kinds of debt may take longer to be removed from your credit history.

If you find that an account that has been settled or resolved through a debt settlement program is not reported as being settled, still shows as open, or still has a balance associated with it, you have the right to dispute it.

Debt Settlement Companies and Credit Reporting

If you're considering or are already enrolled in a debt settlement program, you might wonder if they report your progress to the credit bureaus. Debt settlement companies do not usually report to the credit bureaus. Although you make payments to a debt settlement company to settle debt you owe, you don't actually owe the money to them so they cannot report your program payments.

How to Dispute a Settled Debt

Disputes should be done directly with each of the credit bureaus. You can find instructions for initiating a dispute on each of their websites. The steps may vary slightly depending on the bureau or the nature of your dispute, but the typical steps to dispute a settled debt on your credit report are:

1. Gather evidence- This may include a settlement offer, payment history records, or communication with the creditor proving that you have settled or paid the debt in full.
2. Create a dispute letter- This should include details about why you are disputing and speak to the evidence you have to back it up.
3. Send your dispute letter- You can send this via email, fax, or mail using the contact information provided by each of the credit bureaus. Sending with return receipt requested ensures your letter isn't lost and keeps the bureaus accountable.

After sending your letter, the credit bureaus then have 30-45 days to investigate the dispute. A dispute will usually trigger an investigation of the remark in question. If the credit bureau can't verify that the debt was settled, they must remove it from your credit report.

Debts that are settled are usually reported as settled in full. However, sometimes items are misreported. This is why it's important to keep records of any agreements you make with creditors during a debt settlement process – such as copies of payment confirmations or letters from your creditors.

Regular Review and Monitoring of Your Credit Report

As a consumer, it is highly beneficial to regularly review and monitor your credit report. This practice can help you identify any inaccuracies or discrepancies promptly and take immediate action. Additionally, regular monitoring can provide a clear understanding of the factors influencing your credit score and help you manage your financial status more effectively.

Under the FCRA, you have the right to one free credit report every 12 months, but events in recent years have led to easier access to credit reports. The covid-19 pandemic prompted credit bureaus to make free weekly credit reports available through December 2023.

By taking advantage of the FCRA and monitoring your credit report regularly, you can put yourself in a better position to address any issues promptly.

Other Debt Collection Laws

The FCRA is an important law to know about if you're in a debt settlement program, but it's not the only one. Let's consider a few other laws that would be wise for a debt settlement customer to become familiar with.

Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) is a federal law that regulates the behavior of debt collectors when attempting to collect a debt. The FDCPA prohibits creditors from engaging in unfair, deceptive, or abusive debt collection practices. This includes threatening violence, calling early in the morning or late at night, using obscene language, refusing to provide information, and more.

Truth In Lending Act (TILA)

The Truth in Lending Act (TILA) is a federal law that requires creditors to provide consumers with written disclosure of the terms and conditions of a loan. This includes information about the annual percentage rate, finance charges, total payment amounts, due dates, late fees, and more. It also requires lenders to inform borrowers when they have been approved for a loan.

State-Specific Consumer Protection Laws

In addition to federal protections, state laws aim to protect consumers, too. These vary from place to place, and some simply default to federal laws, but many states have state-level statutes related to debt collection, credit cards, identity theft protection, and more. In some cases, these laws are more strict than federal regulations. It's important to research the consumer protection laws specific to your state in order to be aware of your rights.

Consider an FCRA Attorney

If you've disputed the remark and the settled debt still appears on your credit report as an open account or shows a balance, it may be time to retain an FCRA attorney. An FCRA attorney can file a lawsuit against the credit reporting agencies and/or creditors if there is evidence that suggests they are in violation of your rights under the FCRA.

Debt settlement can have a negative effect on your credit score, and it may take some time for you to recover, which is why it's so important that debt collectors promptly report settlements. Understanding how the Fair Credit Reporting Act applies to debt settlement will help you minimize any unfair damage to your credit rating.