Collections, Charge Offs, and Judgments: What They Are and How to Get them Resolved

We continue to process the pain and hope of our nation’s uprising for racial justice amid a global health crisis. You can see our recent statements on the uprising here, our COVID-19 web page here, and our Race & Housing resource center here. Expanding homeownership is a key component of racial equity and health, so our mission has never been more important—and we’ll continue to share the stories of Habitat’s work.

Collections, Charge Offs, and Judgments are all types of “derogatory debt.” In our new Homebuyer Tips Video, Twin Cities Habitat for Humanity’s Homeowner Development Manager, Pa Lor, will walk through what each of these mean and how they affect your ability to buy your first home.

What are Collections?

Collections are unpaid debts that have been forwarded to a lender’s collections department or an outside agency. Collections show on your credit report.

READ: Can I Buy a Home If I Have Collections on My Credit Report?

What are Charge Offs?

Charge Offs are debts that cannot be collected and are written off by the lender. Even though it’s written off as a loss on the lender’s statement, charged-off debt is not forgiven and will show up on your credit report for up to seven years. This usually happens after 180 days of no payment. 

“I like to refer to this type of debt as ‘dormant debt’,” says Pa, “because lenders can still sell this charge off to collections companies who may then try to pursue you to collect that debt.”

What are Judgments?

Judgments are the result of a creditor or collector's lawsuit over an outstanding (unpaid) debt. It results in the borrower's legal obligation to pay a debt.

How Do I Find This Information?

Both collections and charge offs can be found on your credit report. If you don’t have a copy of your credit report, you can request a free copy at AnnualCreditReport.com. Check out our Guide to Credit Scores and Your Credit Report to learn more about how often you can check your credit score and access your report.

Judgments are publicly-accessible information and can be found by searching your name on your state’s court website. If you live in Minnesota, your court website is mncourts.gov. 

How Does Derogatory Debt Affect My Ability to Buy a Home?

Depending on your lender, derogatory debt could prevent you from getting a mortgage. In fact, many lenders will require you to pay off derogatory debt in full before you can qualify for a mortgage. 

That said, there are lenders that may have some flexibility and allow you to carry a small amount of derogatory debt. One such example is Twin Cities Habitat for Humanity’s subsidiary mortgage company, TCHFH Lending, Inc. Our lender allows clients to carry up to $1,000 in collections or up to $3,000 in medical collections and still qualify for a mortgage product.

Learn more about our mortgage product here.

How Can I Settle These Debts?

When it comes to settling debts, you have two basic choices: 

1. You can settle debts and negotiate with the creditor directly (on your own), or 
2. You can work with a debt settlement company to help out.

Negotiating on Your Own

Start by reviewing your credit report. Your report will show you the contact information of the creditor so you can reach out to them and discuss your needs. You may be able to settle the debt for less than the amount due, depending on the type of debt. However, there may be tax implications for settling for less. Pa recommends consulting with a tax advisor before taking that route.

Working with a Debt Settlement Company

Unfortunately, there are a lot of scams out there that look like debt settlement companies. Here are a few red flags to be aware of when researching companies:

• Do they require up-front payments? The Federal Government prohibits debt assistance companies from collecting up-front fees before they deliver assistance.
• Are they making promises that sound too good to be true? Promising to make all collections calls and lawsuits stop completely, completely resolving all your debts, or reducing your debts by 70%, 80% are good indicators that they’re trying to scam you.

• Are they promising money-back guarantees? If they’re making too many guarantees, they’re probably not as legitimate as they claim.

While those are some good things to avoid, here are a few ways to ensure you’re working with a reputable debt settlement company:

1. Check the company’s credentials. Ask them if they’re licensed to do business in your state and if the person you’re working with is an IAPDA-certified debt consultant.
2. Read the fine print. In any agreement you sign, make sure you fully understand what you’re signing (how much will it cost, what will the outcome be, etc.).
3. Visit nfcc.org. This is the National Foundation for Credit Counseling’s website. They’ll help you find a qualified, legitimate debt settlement company.

There are a lot of steps you can take to become fiscally sound before buying your first home. If you’d like to find more information about paying off debt, watch our video, “Understanding Debt and How to Pay it Off Strategically.” Also, subscribe to our YouTube channel for more first-time homebuyer tips.