What Is Junk Debt And Why Do I Care About It?

You may have heard of ‘junk’ categories before.

You can find junk bonds, junk dealers, and junker cars.  The term means the same thing:  an item of low or poor value.

Well, now we have junk debt.  Junk debt is debt that is either uncollectible through ‘normal’ means, or debt of very low value.

I’ll give you an example:

I got a letter 2 days ago from a law firm.  They claim I owe $40.00 from a parking ticket 7 years ago.

Think about it.  They paid about a buck to send the letter.  They probably bought the debt for about $8.00.  So, they stand to make about $30.00 if they can collect the whole thing.

But they have 2 problems.  First, the statute of limitations in my state is 6 years.  So they can’t sue me.  Second, they will have to prove it is mine, and that I didn’t pay it.  Both of these are tough to get past if you know how to deal with the debt collector.

Low margins.  Old debt.  No legal recourse.  Seriously, this is junk.

So why do they buy it?  Well, many people look at these old accounts, and settle for much less.  A $20.00 payment is a huge profit for the collector, and costs less than the movie you buy when you are checking out of Wal Mart.

That one happened to be cheap.  But how about bigger ticket items?

Utility companies, library fines, parking tickets, local taxes – all these things are being sold as junk debt.  Many of the accounts are decades old, and they are virtually un-provable.  The firms that buy these accounts have a hard time collecting, but almost all of what they collect is profit. Many people just go ahead and pay when they get the bill, just so it ‘won’t show up on their credit report’.

Why do I care?  These debts can be reported to the credit bureaus.  If the old debt is reported, it will affect your credit scores negatively.  As someone who is concerned about credit, you need to avoid this at all costs.

If you are notified you owe an old debt, you need to contest the debt.  Make sure the debt is actually yours, and don’t settle with what the collection company tells you.

Remember, these can end up on your credit report, but usually they are so old they can’t stick.  You can get them cleaned up, and get rid of them, with out paying, but you need to understand how to clean those credit reports up.  Make sure you do the research and understand how to fix the problem.  Or, just read my book!