Can You Use a No Contract Dispute for Debt Collections?

Man ripping contract at desk
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Every once in awhile, there’s a new myth about a credit repair secret or loophole that you can use to get information off your credit report or get out of paying debts you owe. This time, it’s the “no contract” loophole that claims you can get out of paying debt collections.

The myth comes from a comment left on a credit forum. “Don’t Pay Them a DIME!” is the post title. “If the original creditor sold your debt to a collection agency, they also wrote off your debt on their taxes…” this much is correct. Creditors charge-off accounts after they become severely past due.

“…which also wrote off your obligation to pay.” This is where the advice goes wrong. The post advises people to dispute collections––which is a right you have under the Fair Credit Reporting Act––but to list “contract was cancelled” as the reason, under the assumption that a debt that’s sold to a collection agency is cancelled.

Here’s the truth.

The companies you originally create a debt with assign or sell delinquent debts to third-party collection agencies to collect the debts on their behalf. While you did not create a contract with the collection agency (unless you entered a new agreement to settle or pay the debt), the original creditor has the right to sell your original contract. This is what gives the collection agency the ability to add a debt to your credit report and pursue you for the outstanding debt.

Can a No Contract Dispute Work?

You have the right to an accurate credit report. This right allows you to use the dispute process to remove inaccurate, incomplete, and unverifiable information from your credit report. The credit bureaus only have to remove information that falls under that criteria.

When you dispute something on your credit report, the credit bureaus are required to investigate your dispute with the information furnisher - in this case, the collection agency. The information furnisher then replies with a confirmation of whether your dispute is valid. The credit bureau updates your credit report based on the information furnishers response.

Disputing a collection account on your credit report and citing “no contract” could be successful if the debt collector doesn’t respond to the dispute. For example, if the collection agency is no longer collecting on that debt, they may not respond to a request to verify the debt. In this case, it qualifies as “unverifiable” and the credit bureaus would delete the collection from your credit report. The fact that the debt collector failed to respond to the investigation that makes the dispute successful, not the “no contract” claim.

If a collector is actively collecting on your debt, they may verify the dispute with the credit bureau and the collection would stay on your credit report. In some instances, disputing a valid and active debt collection with the credit bureaus may spark the debt collector to take action on your debt. For example, they may begin calling or sending letters or even file a lawsuit against you if the debt is within the statute of limitations.

Should You Pay a Collection Agency?

Debt collectors don’t always have the necessary documentation to prove that you owe a debt and that they’re authorized to collect the debt. You can request this proof within the first 30 days of hearing from a debt collector. If they’re unable to provide proof of your debt, they can no longer collect from you, which includes listing the collection on your credit report. They can, however, sell or assign the debt to another collection agency which starts the process all over.

Paying a debt collection can be beneficial if you’re trying to get approved for a mortgage, the lender may require you to take care of all outstanding debts before you can be approved. In this case, you’ll have to pay the collector or try to have the account removed from your credit report. If you’re unable to pay the debt in full, you may be able to settle for a fraction of the outstanding balance to bring the debt out of a past due status.

Debt collections can only be listed on your credit report for seven years. This is something to keep in mind as you’re weighing whether to pay off a collection or wait for it to drop off your credit report.