One of my favorite movies is The Princess Bride. There are so many quotable lines, but the ones I remember most is from Inigo Montoya, played by Mandy Patinkin. Another character, the evil and incompetent Count Vizzini exclaims, “Inconceivable!” every time one of his hare-brained schemes to do harm fails. After several attempts and yet another “Inconceivable”, Inigo tells the Count, “You keep using that word. I do not think it means what you think it means.
Similarly, when I speak to my small business clients and they ask me to “ruin someone’s credit” over an unpaid invoice, I tell that the credit reporting of bad debts does not necessarily accomplish what they think it does.
The goal of bad debt collection should be to get paid – period. You are understandably upset if you do not get paid, but it is not personal. Put your personal feelings aside and focus on getting your money back.
Does reporting a debt to a credit bureau get a debt paid? It can. However, in my 12 years’ experience, I have only seen a handful of cases where it made a difference. On the other hand, reporting a debt incorrectly and the arduous process of removing an incorrect item are real.
The Fair Credit Reporting Act (FCRA) was established in 1970 to protect the privacy and accuracy of individual credit files. It is a very good law that provides consumers with several protections. However, the law presents some opportunity for liability on the part of people who report to credit bureaus, called furnishers – inaccurate reporting, or for failing to respond to a dispute or request for removal. The law requires furnishers to make a “reasonable effort” to investigate and correct or remove an item, but gives no guidance as to what sort of effort is reasonable. Similarly, it is not entirely clear who would liable as the furnisher – the reporting agency, the original creditor, or both.
FCRA lawsuits are rising and the trend is expected to continue. If you do not think that you could ever report a debt incorrectly, think again. There are many people with common names, and similar addresses and it is very easy to make a mistake.
It is also important to make sure that credit reporting is not overused or too heavily relied upon as a collection tool. If an agency tells you, “we report all debts to the credit bureaus in 60 days”, you should ask them which other ongoing efforts they will make. Persistence is key in collecting debt, and an agency that is simply going to slap it on a credit report after 60 days and do nothing more may not be working in your best interest.
So, before you attempt to navigate these murky waters, ask yourself these simple questions:
· What am I trying to accomplish by credit reporting?
· Do any benefits outweigh the risk?
· Is your collection agency actively working the file or simply parking an item on a credit report and hoping for the best?
· Are you certain that any item being reported is accurate?
Simply stated, credit bureau reporting can be a valuable tool. It does not work in every situation, and is certainly the only thing you should do. In some cases, it can cause more harm than good. It should NEVER be used as a substitute for personal contact with your customers, and a continued effort to work out a reasonable repayment arrangement.