Smart Money Podcast: How to Travel Safely, and How to Handle Old Debts

Liz Weston: Welcome to the NerdWallet's Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston.

Sean Pyles: And I'm Sean Pyles. As always, be sure to send us your money questions. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

Liz: And while you're at it, please rate, review and subscribe wherever you're getting this podcast.

Sean: In this episode, Liz and I tackle a question about how to handle a debt that's in collections with the goal of improving credit. But first, in our This Week in Your Money segment, Liz and I are talking with Travel Nerd Sam Kemmis about what it means to travel safely right now. So let's get to it.

Liz: Hey Sam, welcome to the show.

Sam Kemmis: Hey, Liz and Sean. Great to be here.

Sean: Hey, we're happy to have you. So we wanted to have you on because more people are flying compared to the beginning of the pandemic. I've thought about it a little bit, but I'm still personally pretty wary of flying for some big reasons. You know, safety being the biggest one. And I know that you've done some reporting on the subject, and I thought you might be able to enlighten us about how to fly safely. With the big, big caveat that you are not an infectious disease expert, I'd like to hear from you what you think people should consider if they do want to fly safely right now.

Sam: Covering this, I had the opportunity to speak to an actual expert. Her name is Molly Hyde, she's an infection control practitioner. And she didn't have great news for me in terms of the safety of flying. She had a pretty dour outlook on it. Her take was just the danger with this virus is being inside an enclosed space with other people. And that is what flying is.

Sean: Yeah, it's a tin can in the air where you're stuck with several strangers for who knows how long.

Sam: Yeah, exactly. She emphasized what a lot of experts have emphasized: that the two big issues are maintaining social distance and being in an area where other people are wearing masks and you're also wearing a mask. Airlines have done a lot to try to address that. Some have done a lot more than others. At this point, every major U.S. airline is requiring guests to wear masks throughout the flight, except if they're drinking or eating, which is an interesting caveat. But the real issue here, as probably people know who have been in public spaces, is the enforcement of that policy. There are a lot of people who get on a plane and really don't want to wear a mask and either cite health concerns for that, or sort of other issues. And so sort of the stage we're at now is airlines are introducing policies for enforcing the mask policies.

One of my favorite policies one airline is, actually has introduced, a yellow-card policy in which they hand out a yellow card like in soccer to customers who are not wearing their masks. The yellow card has a little explanation for why it's important to wear the mask, what will happen if they don't wear the mask. So you can actually lose your ability to fly with this airline if you don't wear the mask. So, really looking out for airlines that are stepping up their mask enforcement policy, I think is a huge thing that you can do. If you need to fly, you can try to make sure that you're flying with an airline that's taking that really seriously. We've written a lot about which airlines are doing that better than others.

Sean: It seems like there's a lot that consumers can do individually in terms of, as you mentioned, wearing a mask, or I've heard that goggles can be really helpful as well. I was looking into this a little bit and I saw that Naomi Campbell was flying while wearing a hazmat suit, which I loved for the sheer drama of it all, but it seemed maybe a little bit excessive. From what I've heard, you don't need to go that far, but the things that you can do to cover areas of your body, where you might be able to have transmission of the virus, like your mouth, like your eyes, and probably some hand sanitizer on hand, are good ways to keep yourself safe throughout a flight.

Sam: Yeah, exactly. And again, I don't know the specifics about what will help the most, but sort of the more precautions you can take, the better. Covering your eyes, covering your mouth, washing your hands with hand sanitizer, not touching surfaces on the plane, sort of all the commonsense things that you would want to do. And then really just being careful about maintaining social distance as best you can. And that includes during the boarding process, not crowding on top of other people as they're getting their bags in the overhead space and that sort of thing.

Liz: I know that early in the pandemic, they were talking about keeping the middle seats open. Are they still doing that, Sam, do you know?

Sam: Yeah, many airlines are blocking middle seats, and some interestingly have rolled back those policies and are now filling planes to capacity when they can. So that's another thing you can really do to make sure you're ensuring your own safety is check the airline policy before you book to see how serious they are about blocking off those seats.

Middle seats is one thing, but if you think about it, you're also sort of sitting as close to the person behind you and in front of you, as you are to the person next to you, in some ways. They are breathing kind of right on top of you. So really airlines that are capping the capacity of their flights to make sure that you're not on a packed flight, that's one of the most important policies. And it's also one of the hardest for them to swallow, for the airlines to swallow, right? Because that means getting less money for their flights. So it really sort of shows which airlines are willing to put their money where their mouth is.

Sean: Can you talk about other categories that people should be thinking about in terms of how they can evaluate the safety of an airline?

Sam: There are sort of a few steps that airlines can take to ensure a social distance. One of them is to change the boarding procedure, and we've seen some airlines no longer giving priority boarding to certain customers. And that basically means that you're boarding the plane from back to front, and that can maintain social distance throughout the boarding procedure. Other airlines are handing out amenity kits when you get on that include hand sanitizer and that sort of thing. That's sort of a new feature that we've seen. And then yeah, blocking middle seats, cutting the maximum capacity and then allowing customers who feel uncomfortable on a flight that is twofold to change to another flight for free. I think that's a really important policy that some airlines have introduced.

Sean: And I've heard that some airplanes have been upgraded with new air filtration systems that cycle in new air every two to six minutes or so. Do you know how widespread that is being adopted by airlines?

Sam: Yeah. What I know is that all of the major airlines are touting their new air filtration systems. What I don't know is which of those are actually effective and which are not. It's pretty hard to cut through the noise of the sort of PR stunt of this. And again, not being a health expert, I'm not in a position to say, “Oh yeah, you want one that has a 99.9% filtration rate,” or whatever.

That said, I think paying attention to what health experts are saying about air filtration and what's important is helpful. But I think my understanding at the end of the day is that there's only so much that those filtration systems can do to actually prevent the spread of the disease. If someone breathes directly on you, the air filtration system doesn't have a chance to sort of filter out the virus from the air. So there's always going to be some risk.

Liz: Have you flown recently? And what would it take to get you in a plane?

Sam: Yeah, I have not. I know a lot of people in the travel space are getting back in the air and trying to book new flights, but I just haven't. I haven't felt comfortable doing it. And I have traveled. So I've been on the road, I drove up from California to Montana. I'm currently in a hotel in Seattle. So there are certain elements of travel that I am starting to feel more comfortable with. But air travel is still a little spooky to me.

Liz: It does feel like with the road trip, you have more control, especially since you travel in a van. So you can stay in your van if you need to, right?

Sam: That's something I spoke to Molly Hyde about, the health expert. I sort of asked her point-blank, “Hey, if you had to either drive somewhere or fly somewhere, which do you think is safer?” Because the problem with taking a road trip is there are a lot more points of contact and a lot more unknowns, and there's just a lot more time spent traveling, right? Even with that, she was pretty clear that she thinks driving is safer at this point. And that really is just that you're in much more control of the social distance that you're maintaining with other people. You know, the trickiest thing is going to the bathroom, as I found. My van does not have a bathroom. So if you do need to use a bathroom, that's sort of the trickiest part is you're going to be in an area where other people are, and you're not sure how it's being cleaned and that sort of thing. So, minimizing that risk. I actually saw an article that was sort of like "how to pee in the woods." That's also a helpful tip.

Liz: Definitely.

Sean: I want to circle back to flights really quick because I had to book a flight a few weeks back for a family emergency. I didn't end up taking it, but I also couldn't cancel it. I ended up just getting a credit. And I'm wondering if you can talk about what airlines are doing for cancellations or reschedules, or what's the general theme here of what airlines are doing?

Sam: Yeah. The general theme is what you encountered, which is that most airlines are offering more flexible policies on most fares that they're selling. Usually, if you bought a ticket and then had to cancel it last minute, for most fares, you'd just be kind of out of luck. You'd need a huge change fee or cancellation fee and not get anything in return. And they are offering much more flexible fares now so that you can cancel them. And most airlines are going to offer a credit for that. They're not just going to give you your cash back, unless there's some outstanding circumstance or you have travel insurance or something like that. Obviously, the travel insurance wouldn't be handled by the airline in most cases.

Sean: OK.

Liz: Sam, I made a completely rookie mistake. I still can't believe I did this. But I canceled a flight rather than waiting for it to be canceled. Unfortunately, it was a flight for my husband. It was international, and I had upgraded him. And so it was a lot of money sitting there in a credit. Is there any chance of getting that money out of there? Because I don't think we're going to be traveling in the next year or so.

Sam: You can try. Sort of the best expert advice I can give is give them a call, see what's possible, be friendly, try to work with them. But the other thing that you can sort of cross your fingers for or ask for is an extension of the expiration date of that charge. They might give you a credit. Let's say it was a thousand dollars, but it expires a year from now. Like you said, that's not super helpful because you're not planning to travel in the next year. Some airlines are extending those vouchers much longer, into 2022 and so on, and others are being more stingy. But you might have some luck calling and saying, “Hey, I'm not going to be able to use this in the next year. Is there any way I can get this voucher extended?”

Liz: OK, great. I'll give that a try.

Sam: Yeah, let me know how it goes.

Liz: I will.

Sean: All right. Well, is there anything else you think that listeners should know about traveling safely right now, besides perhaps to not travel at all?

Sam: This is all about risk management, and really that is the safest thing you can do is stay at home. I think the other thing we didn't really touch on is hotels. I'm in a hotel right now, so obviously I feel somewhat comfortable with it. Interestingly, hotels were much slower to enforce mask policies for both their employees and guests. We're, just this week, seeing a couple of companies enforce masks for both employees and guests, but that was something that was really concerning for a while there, was you had no idea whether you were going to get into a packed elevator full of people not wearing masks to get up to your room. That's legitimately probably the biggest concern was, staying in a hotel at this point.

Sean: Sounds like a nightmare scenario right now.

Sam: Yes, exactly. So I think just before booking hotels — and a lot of people are taking road trips right now, so are staying in hotels — but just check the health and social-distancing policies for those hotels. Both what they're doing in common areas and elevators and what their mask policy is.

Liz: When you got to your room, Sam, did you wipe everything down? I mean, were you a little paranoid about it or how did you feel about that?

Sam: You know, I didn't, and part of my research has led me to believe that surfaces are much less concerning than crowded spaces at this point. And so I've talked to a couple experts who have said that a hotel room is about as clean of a surface as you're likely to find. And hotels are bending over backwards to tell you all of the chemicals that they're spraying all over their rooms to make sure they're sanitized. Of all the concerns I have, that one is actually relatively low. That said, I still get that, I don't know what to call it, COVID heebie-jeebies feeling when I come into a new room that I'm not sure about its history.

Liz: Oh yeah. Pick up the remote control, it's like, “Ew, other people handled this.”

Sam: Yeah. Well, and that's one big thing, hotels, they've removed a lot of those objects in rooms that are high-touch, as they're called. Things like throw pillows and other objects that don't usually get cleaned in between guests. They've just taken them out of the room. So that's another helpful thing.

Liz: Interesting.

Sam: Yeah.

Liz: OK, cool.

Sean: Great. Well, thank you so much for talking with us, Sam. And safe travels on the road.

Sam: Yeah. Thanks.

Sean: Let's get to this episode's money question, which comes from Jo. They ask, “How should I handle old collections? And what is considered an old collection? I've heard that after so many years, they cannot collect. It's been almost five years since my first collection account was reported, and I'm at a stage where I want to improve my credit. So what is the best way to approach this? I can pay off some of the smaller accounts, but how do I handle the larger ones? What would be the smart thing to do?”

Liz: Oh man, I am so glad Jo is asking us this question before going out and trying to settle these accounts or do something else. The world of collections is so confusing, isn't it, Sean?

Sean: It is. And one thing I love about this question is that it's really five questions in one, and it speaks to how complicated collections are. Because it's not just paying off an old account, it's how does it affect your credit? How should you pay it? And who do you even talk to about all of this? Because these debts are often sold and resold and it can get so, so confusing.

Liz: Yes, exactly. What was the book that we all read? I think it was called "Bad Paper." And if you want to know, the seedy underside, that is the debt collection business, that is great book to read.

Sean: Highly recommended.

Liz: Yes. Yeah. It'll change your mind about a lot of things about collections.

Sean: Right. And I think one thing that I took away from that book is that consumers have a lot more leeway and power here than they may think. I mean, look, by the time your debt has gotten into collections, it's already been shuffled around a handful of times. What's one more week. Just give it a little bit of time to sit and think, gather your information and make an informed decision here.

Liz: Exactly. And you've done a lot of writing about this, and the importance of taking a moment and researching and knowing your rights when you're going into the situation can really help.

Sean: Yeah. I've talked with lawyers, I've talked with debt collectors, I've talked with people who have had their debts in collections. I had a debt in collections at one point in my life, so I've been through this from a million different angles. And Jo, I'm super happy to help you answer your question here, but I want to talk about the first part of Jo's question, which is what is considered an old collection? And there are two facets of this. There's what's considered old for the purposes of credit reporting. And then there's old for the purposes of the statute of limitations on debt, which is basically whether or not you can be sued for debt. So Liz, credit is your area of expertise. So I'm going to punt the first question to you. How do you define old in terms of a collections account on a credit report?

Liz: OK. Just to run through this really quickly. Typically, when you fall behind on a payment, the original credit of the person that you owe the debt to will try to make some effort to collect. But after a certain point, they're going to say, “OK, I'm going to write off this debt.” And they take a tax break for that write-off, and then they typically sell it to a debt collector. So that particular debt can remain on your credit report for seven years plus 180 days from when the account first went delinquent. If an account is on your credit report after that point, that's when you can dispute it and get it taken off.

Sean: Right. So that's what an old account means for your credit report. And Jo, that's what you're going to want to focus on here. You said that it was almost five years since the first account was reported, so you still have a couple years roughly before it falls off your credit report. So if you really want to just shed this thing, you will probably want to take some action now. And we can get to payment options later, but I also want to talk about something else that Jo said, which is that after so many years, they cannot collect. And that's actually a misconception.

Liz: Yes.

Sean: I think that that is referring to the statute of limitations on debt that I mentioned before, which is again, the number of years that you can be sued for payment on a debt. And this varies by state. So you're going to have to look it up for whatever state you're in here, but even if a debt is 20 years old, and if you can't be sued for it, it's not on your credit report, debt collectors could theoretically still keep selling this thing in various portfolios. It's kind of ridiculous that this could still possibly happen, but it's true. And you could still get called for it. And if you make a payment, guess what? That resets the clock on the statute of limitations and it can expose you to a lawsuit. So it's really, really precarious. Just know that you could get called out of the blue for a debt that you haven't thought about since you were in college or even before that.

Liz: One thing to keep in mind is a debt is still owed technically until it's either paid or erased in bankruptcy. So paid also means settled, but paid, settled or erased in bankruptcy. So they can keep coming after you. And as Sean said, they're not supposed to sue you after a certain point, but they do. And the problem is people get sued over out-of-statute debts, debts that are technically too old to be sued over. They get sued all the time. And the debt collector actually collects because the people either don't know about the lawsuit or they don't show up. So that's a huge issue and something you need to know when you're dealing with collections. Also, we should talk about restarting the statute of limitations, right?

Sean: Yes. If you pay even a dollar on this debt, it all resets back to as if it was a fresh debt. And so that means that whatever state you're in, again, it could be three years, it could be 10 years, you could be sued for that debt. So you can really open yourself up to a lot of legal liability if you make one wrong move paying a debt. So you have to be super careful, gather all this information. That's why we said again, take your time to gather the facts and make a plan for how you want to handle your collections debt before you do anything.

Liz: Yes.

Sean: Let's move on to another part of Jo's question, which was managing collections with the goal of improving credit. So something to know is that some newer scoring models don't actually include collections accounts, mostly smaller ones that are around under $100, and often paid collections accounts are not included as well.

A caveat here is that some of these new scoring models are still not widely in use. That's changing, but it's really on whoever is pulling your credit and folks to be using the newer model. So that's a good thing for Jo. If you have smaller accounts, then it might actually not show up. But the bigger ones will likely still be there.

Liz: Yeah. In the bad old days, paying a collections account could actually hurt your score. That particular little quirk was fixed for the most part, but you still can't count on being able to pay a collection and it have the effect that you want. Maybe it will improve your score, but typically it might not have any effect at all.

Sean: Right. And it's hard to predict exactly how much a score might change one way or another. But if you are going to be home-shopping, you want to clear out these collections accounts because mortgage lenders are not going to be too happy if they see that on your account. So, Jo, depending on what your goal is, it could make a lot of sense to clear these out just for the sake of having a cleaner credit report. And that brings me to options for paying a collections account and ways to resolve this.

Liz: All right. So assuming Jo does want to pay these collections, how does Jo go about it?

Sean: All right. So first, as we said, gather your information, Jo. Before you pay, gather everything you have from your credit report. Also gather what a debt collector should have sent you. It's called a debt validation letter, and that should include details of who the original creditor was, the amount owed. And also gather information from your own accounts because debt collectors, they may send you a debt validation letter with erroneous information. That's because as these debts are sold and resold and sold yet again, some errors can slip in. So you want to make sure that everything is totally correct. And if you see something wrong, you can refute that. You'll have to send in some receipts, of course, but again, make sure that you know exactly what you're up against and you can make a plan for how you want to pay it. Smaller accounts you may just want to wipe out, depending on how big they are and how much cash you have. Bigger ones, you'll probably have to think about your other options, like making a payment plan, or maybe even settle the account for less than you originally owed.

Liz: Let's talk about that because I think this is something people don't realize, that doing your own debt settlement might be a really good idea. And the issue is that these debt collectors typically spend pennies on the dollar. So you might have owed the original creditor or lender a hundred bucks, but this debt collector bought the debt for 5 cents or 2 cents. It really does not make any sense to pay the collector a hundred bucks. That's just pure profit for them.

Sean: I mean, exactly. You're padding their pockets and that's how they can make a sustainable business. So I think going into it knowing that you have a lot of leverage here because they purchased the debt for so little is a good place to come from as well. So depending on how skillful a negotiator you are, and how much debt you owe and how much money you can put toward it, I think a payment plan and settling are your two really viable options for these bigger debts here.

For a payment plan, you can make monthly payments over time to totally resolve what you owe. But with a settlement, you'll probably be expected to pay it off in one lump sum. And with typical negotiations, you'll want to say something like, if you can afford 50% of what you owe, low ball them at 30%, they'll probably have a little bit of back and forth, but you'll likely find some middle ground. Because again, anything above that amount that they bought it for is all profit for them. So they do this all the time. It's not foreign to them. And so while we're talking about debt settlement, there are so many technical and complicated ins and outs of this process that people should be aware of, right, Liz?

Liz: Yeah, absolutely. When you start these negotiations, you could wind up inadvertently triggering a lawsuit. And that's probably the scariest thing that can happen. But even if that doesn't happen, if you do manage to successfully negotiate a settlement, there's something else people don't know, which is that the forgiven debt can be considered income to you. In other words, you could get an income tax bill for the amount of the forgiven debt. And that's why it's so, so tricky to do debt settlement, and also to hire someone to do debt settlement for you. Because once you get through paying their fee, once you get through paying the creditor or whatever, the amount is settled, and then you have to pay the IRS. A lot of times you're not saving very much. So you want to keep in mind that any time you do a debt settlement, there may be a tax bill attached to the amount that you didn't have to pay.

I'm going to step back again, because whenever you're thinking about dealing with a collection agency, you want to have your goal in mind. We sort of started talking about the details of this, but if, for example, you just have a general desire to improve your credit, there are probably a lot of other things you can to do that. Like a secured credit card, for example, or a credit builder loan, something like that, paying down any credit card balances you have. Those things are going to have a much bigger impact on your score than dealing with collections.

If it's a situation where you aren't going to need really good credit for another couple of years, maybe just wait for these old ones to fall off your credit report. Then you have a lot more negotiating room on top of everything else. The debt collector knows the debts are no longer on your credit report. So they're much more likely to accept a lowball offer than if those things are still on your credit report. But if it's a situation where you want to buy a house within the next six months, then maybe you want to take action a little bit more quickly.

Sean: I think there is something to be said about just wanting the collection account to be gone for the sake of it being gone. That's what my experience was. I found it on my credit report. This was a number of years ago now. It was from some utility company in college. I just never closed the account. And so they kept billing me and then eventually ... I had moved a number of times and I just never paid this thing that I didn't even know that I owed. And when I saw it, I said, I want to get this thing out of here because it seems like it's going to make me anxious just thinking about it. So if that's where you are, Jo, that's fine too. But know, again, if your goal is to raise your credit, as Liz said, there are probably things that you can do on a regular basis that will have a bigger impact.

Liz: Yeah. And I had a similar situation. When I moved from Orange County to Los Angeles County, our mail got misdirected for a while and somebody had packed a library book into one of the boxes. I hadn't even opened the box when I discovered that there was a collection on my credit report. I disputed it right off the bat and I found out this was a municipal fine that had been turned over, a library fine that had been turned over to a collector. They don't report those anymore. But back then, they did. And I basically waited them out. I was so ticked off about the whole thing. It was only at one credit bureau, so it didn't affect all three scores. My other two scores were great. I think it knocked maybe 50 points off the one credit bureau score. And then after, I want to say five years, I just disputed it and it went away.

So sometimes with those small things, you can make them go away that way. I'm not saying it's the best way to do it, but I didn't need to improve my credit a ton because my credit was already good. So everybody's situation's a little bit different. I would just say, if you don't have enough money to pay off all the collections, you want to be very careful about starting these negotiations because that could trigger a lawsuit. That's why I'm saying be a little bit careful about this.

Sean: Yeah, I think that's a good point here. Paying off collections is often something that we list lower down on the list of financial priorities. If you don't have a bunch of money saved up right now, I would focus on that. Again, unless you have a specific goal that you want these things off your credit report for. So think about all of these different factors and whether it's really going to take you as far as you might think it will. But one thing that I really would be remiss that I did not mention is that as you go into these conversations with a debt collector and you make some sort of agreement one way or another, you have to, have to, have to get this in writing. That's in part to make sure that that collectors really follow through on what they say they're going to, and also for your own records.

So that way, you know what you're going to be expected to pay. And then you have some finality to it. Because there are so many errors in the debt-collection process. You might get contacted yet again, even after you settle your debt or pay off your debt for payment from a different debt collector, because these things just slip through. So you need to hold onto these records for a while just to make sure that you don't get asked to pay it again.

All right. Well, I think with that, we can move on to our takeaway tips. Liz, do you want to kick us off?

Liz:Takeaway tip number one, before talking with a debt collector, know your legal rights, including your state statute of limitations on debt.

Sean: Next up, if your goal in paying off the account is to improve your credit, know how collections accounts are factored into your score and that you might actually go further with other things like making on-time payments and lowering your utilization.

Liz: Finally, understand your payment options with collection accounts and that you likely have some leeway to negotiate.

Sean: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your question at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcasts for more info on this episode. And of course, remember to subscribe, rate and review us wherever you're getting this podcast.

Liz: And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.