What can you do when a bogus debt appears on your credit report?

You’re doing your best to pay your bills. The last thing you need is someone purposely sticking you with a bill that’s not yours. It happens. There’s a name for such shenanigans, debt parking, which are in fact illegal.

The Federal Trade Commission says it’s the practice of placing purported debts on consumers’ credit reports without first attempting to communicate with the consumer about the debt. You may not discover it until you apply for a loan or a job and your credit score comes into play.

The FTC recently addressed debt parking for the first time in a case against debt collector Midwest Recovery Systems, which reported to credit reporting agencies more than $98 million in questionable debts and collected more than $24 million from consumers on them.

In one example cited in the complaint, a man applying for a mortgage was told that an outstanding medical debt of $1,500 lowered his credit score. When he followed up with the hospital, he found out he only owed $80. However, the FTC said Midwest Recovery refused to remove the debt and threatened him with a lawsuit if he didn’t pay the $1,500.

"Debt parking is illegal and violates the Fair Debt Collection Practices Act and the FCRA’s Furnisher Rule. Collection agencies aren’t allowed to report debts to credit bureaus without first attempting to reach out to a consumer and make them aware of the debt," says Leslie Tayne, a debt resolution attorney with the Tayne Law Group in Melville.

The Fair Debt Collection Practices Act makes it illegal for debt collectors to use abusive, unfair or deceptive practices when they collect debts, whereas the Fair Credit Reporting Act protects your information that is collected by organizations like credit bureaus and medical information companies.

Linda Sherry, director, national priorities for Consumer Action, a consumer advocacy group based in Washington, D.C., calls debt parking abusive. "The debt collector hopes to create a situation in which the person feels forced to pay in order to protect their good credit history and credit score. People sometimes pay a debt that isn’t theirs just to make it go away," she says.

Debt parking is a big deal and places a significant burden on you because it affects your credit scores and credit reports.

"Depending on the accounts falsely listed on your credit reports, debt parking has the potential to disqualify you from a new credit card, auto loan, or mortgage. Alternatively, if a loan is approved, you may find that you don’t qualify for the best interest rates as victims of debt parking," Tayne says.

How to protect yourself

Since these are often bogus debts, one of the best ways to protect yourself is to order your free credit report copies as often as you can. "During the COVID pandemic, you can get one every week if you want. To get your free reports, go to AnnualCreditReport.com. The credit reporting agencies are making these reports free for the next year," Sherry says.

Consider too, signing up for credit monitoring services so you can receive alerts when changes occur on your credit reports. "This way you’ll be notified if there is a new account listed, and you can tackle it right away. Free options include Experian’s Credit Monitoring, Chase’s Credit Journey, Credit Karma, and WalletHub. Look for accounts listed that don’t belong to you, dings in your credit score, incorrect balances, or lenders that sound unfamiliar to you," Tayne says.

You’ve been victimized, now what?

Consumers Action recommends that victims dispute the debt with all three credit bureaus (Experian, Equifax and TransUnion) and submit a complaint to the FTC and the Consumer Financial Protection Bureau. Dispute the debt in writing. There are sample letters on the FTC's website that you can download and use as your template.