Collections Accounts: What Landlords Should Check

Understanding Collections Accounts

Collections accounts appear on a tenant's credit report when they've failed to pay a debt and the creditor has sent it to a collections agency. As a landlord, reviewing these accounts is a critical part of tenant screening. However, not all collections accounts are created equal. Some may indicate serious financial irresponsibility, while others might be minor or even erroneous.

When you pull a tenant's credit report using a third-party screening service, the collections section will list any debts sent to collections. Collections are just one piece of the picture our tenant screening guide for new landlords walks through. Each entry typically includes the creditor's name, the original amount owed, the current balance, and the date it was reported. Your goal is to assess whether these accounts pose a risk to their ability to meet their rent obligations.

Medical Debt: A Special Case

Medical debt is one of the most common types of collections accounts, and it's often treated differently than other debts. In 2023, the three major credit bureaus (Experian, Equifax, and TransUnion) stopped including paid medical collection accounts on credit reports. Additionally, unpaid medical debt isn't included on reports until it's at least a year old, giving tenants more time to resolve these issues.

As a landlord, you should consider medical debt differently from other types of collections. Our deeper look at medical debt on tenant credit reports covers the reporting rules in detail. While it can indicate financial hardship, it doesn't necessarily reflect a tenant's willingness or ability to make payments. If you see medical collections on a tenant's report, ask about their current financial situation and whether they've resolved the debt. If they've since paid off the medical bill, it may not be a red flag.

Utility Bills: A Mixed Signal

Utility bills in collections can be a tricky signal. On one hand, unpaid utility bills might suggest that the tenant struggled to manage their finances. On the other hand, disputes with utility companies or temporary financial setbacks (like a job loss) could be the cause. Unlike rent, utilities are often essential for daily living, so a tenant who has fallen behind on these payments might be more likely to prioritize them once they move in.

When you encounter utility collections on a rental application, consider the context. If it's an isolated incident or the debt is minor, it might not be a dealbreaker. However, if there are multiple utility collections or the amounts are significant, it could indicate a pattern of financial irresponsibility. In such cases, you may want to require a co-signer or a larger security deposit.

Credit Cards and Loans: Red Flags to Watch For

Collections accounts for credit cards or loans are often more serious than medical or utility debts. These accounts suggest that the tenant has struggled with long-term debt management, which could indicate a higher risk of missing rent payments. Credit card collections, in particular, can be a red flag because they often result from overspending or an inability to manage debt.

When reviewing these accounts, pay attention to the following details:

• The age of the collection: Older collections are less relevant than recent ones.
• The amount owed: Large balances could indicate significant financial stress.
• The number of collections: Multiple accounts suggest a pattern of financial mismanagement.

If a tenant has multiple credit card or loan collections, especially if they're recent or large, it's a strong reason to reconsider their application. You might also require a higher security deposit or a co-signer to mitigate the risk.

Disputes and Errors: How to Spot Them

Not all collections accounts are accurate. Sometimes, errors or disputes can lead to incorrect information on a tenant's credit report. As a landlord, it's your responsibility to verify the legitimacy of these accounts before making a decision.

Encourage tenants to dispute any inaccuracies on their credit report. If they provide documentation showing that a collection account is in dispute or has been resolved, you should take that into account during your evaluation. TenantFlow's document vault can help you organize and review these materials, ensuring that you have a complete picture of the tenant's financial history.

Evaluating the Severity of Collections Accounts

Not all collections accounts are equally severe. To assess the risk, consider the following factors:

• Age of the collection: Older collections are less relevant than recent ones. Accounts that are more than seven years old should no longer appear on a credit report.
• Amount owed: Larger balances could indicate significant financial stress, while smaller amounts might be less concerning.
• Number of collections: Multiple accounts suggest a pattern of financial mismanagement.
• Type of debt: Medical and utility debts are often treated differently than credit cards or loans.

Use these factors to create a risk assessment for each tenant. If a tenant has a single, old medical collection with a small balance, it might not be a red flag. However, if they have multiple recent credit card collections with large balances, it's a strong indication that they may struggle to meet their rent obligations.

Communicating with Tenants About Collections Accounts

When you find collections accounts on a tenant's credit report, it's essential to approach the conversation with sensitivity. Tenants may be embarrassed or defensive about their financial history, so it's crucial to handle the discussion with care.

Start by explaining that you're reviewing their application thoroughly and want to understand any potential risks. Ask them to provide context for the collections accounts, such as whether they've resolved the debt or if there were extenuating circumstances. You might also ask for documentation, such as proof of payment or a dispute letter.

Making the Final Decision

After evaluating the collections accounts and discussing them with the tenant, it's time to make a decision. Consider the following questions:

• Does the tenant have a history of paying on time despite the collections?
• Have they resolved the collections accounts, or are they still outstanding?
• Are there extenuating circumstances that explain the collections?
• Does the tenant have a stable income and a reasonable debt-to-income ratio?

Based on your evaluation, you can decide whether to approve the application, require a co-signer or larger security deposit, or reject it. TenantFlow's financial reporting tools can help you assess the tenant's overall financial health, giving you confidence in your decision.

Documenting Your Decision

Regardless of your decision, it's essential to document the reasons for approving or rejecting a tenant application. This documentation can protect you from fair housing complaints and provide a clear record of your decision-making process.

In TenantFlow, you can attach documents to tenant records, including credit reports, dispute letters, and any other relevant materials. This ensures that all the information is in one place and easily accessible if needed.

Reviewing Your Screening Criteria

Tenant screening is an ongoing process, and your criteria may evolve over time. Regularly review your screening policies to ensure they're fair, effective, and compliant with local laws. Consider consulting with a legal professional or a property management expert to stay up-to-date on best practices.

By understanding which collections accounts matter and which to overlook, you can make informed decisions that protect your investment while providing a fair opportunity for tenants. TenantFlow's comprehensive tools can support you throughout the process, from credit reporting to document management and financial assessments.