Often, when someone’s car is not running, being used, up for sale, or if they have switched to another auto insurance company, they choose to ignore the insurance bills they receive. Ignoring insurance bills is a huge mistake, which can harm people’s credit score, if they continue to ignore them. I’m blogging today to tell you why this happens, and how you can avoid it happening to you.

Many people receive letters from their insurance company threatening to refer their account to collections, for an amount the insurance company says they owe on a canceled insurance policy. This happens frequently when people ignore bills and do not cancel their insurance properly. Unexpectedly owing money on a canceled insurance policy, is one of those experiences leading people to feel ripped off by their insurance company.

If you were paid to date on your car insurance, and now you don’t want the insurance anymore, it makes sense you don’t want to pay a bill to give you insurance coverage for the next month. However, not paying a bill does not cancel your insurance as of the due date on the bill.

You know you don’t want your insurance anymore, but your insurance company does not know it. What if you misplaced the bill, and forgot about it? What if the bill was never delivered by the post office? What if you did not have the money to pay by the bill due date? If you want the auto insurance, canceling the policy, because of one missed bill, would cause a lot of problems for customers.

Legally, auto insurance companies cannot cancel you for one missed bill without a cancel date on it. A car insurance company must send you a bill specifying a cancel date, and the state you live in regulates how many days you have, from the date of mailing of the cancel notice, before the date of cancellation.

For example, you receive an auto insurance bill for $100, due November 1st. You sold your car, so you ignore the bill.

The insurance company sends you another bill, 10 days after November 1st, stating the amount of  $200 — for November & December — must be paid, or your insurance will cancel as of December 1st. You ignore that bill.

10 days after December 1st, your auto insurance company notifies you your auto insurance canceled on December 1st, and you owe $100 to pay for insurance coverage until that cancel date, and if you don’t pay it, you will be referred to collections, hurting your credit score.

How could you have avoided the situation? Instead of ignoring the bill, contact your insurance company or agent to cancel the policy, at the time you wanted it canceled.

In the above situation, where the car was sold, you can have the policy backdate canceled to the day after the sale, if you have written documentation of the date of sale, like a bill of sale.

So, even if you made the mistake of ignoring the first 2 bills, you could still have your car insurance policy properly canceled as of the day after the car’s sale, when you contact the insurance company or your agent when you received the third bill, if you provide your insurance company with documentation of the sale date. If you auto insurance was paid up to the sale date, you would owe nothing.

My advice is don’t ignore any bills, and contact your insurance company as soon as you are ready to cancel it.

Your insurance company may make a few attempts to collect the money owed on a canceled policy, before it is turned over to collections.

Once your account is turned over to collections, it can still be fixed, if you don’t owe anything, and can prove it by showing proof of the sale date, or duplicate insurance coverage, if you switched to another insurance company. But your credit score will be lower in the mean time while you sort it out.

What if, instead of the car being sold, it was not being used, or it was out of service? These are situations where auto insurance companies will not backdate cancel your policy to a previous date. You can still cancel your auto insurance by contacting your agent or insurance company, but your auto insurance will be canceled only as of the date your cancel request was received.

In the previous example, if you ignored the bills, you would owe for the insurance covering you, even though you did not want it, until December 1st, and must pay the $100 owed to avoid your account being referred to collections.

Had you contacted your insurance company (contacting your agent is always preferred, if you have one) when you received the first bill due for November 1st, you could have canceled your policy sooner, and possibly not owed anything more to the insurance company.

Canceling your auto insurance when your car is not running or being used, is not usually a good idea, but I will discuss the reasons why, in another blog post in the future, as part of my blog series explaining what to do in various situations when you want to cancel an insurance policy.

There is one situation when it may be okay to ignore an insurance bill without owing money to your insurance company.

When you policy is up for renewal, and you no longer want the insurance, or if you switched to another insurance company at your renewal date, you could ignore your renewal bill, without owing anything more, even though you may get a second notice of the renewal being due.

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Also, just because you do not have to renew your auto insurance, it does not mean your auto insurance company will not try to make you pay more when you don’t accept your auto insurance renewal.

I worked for one insurance company, where in a certain state, it had to extend coverage for 7 days beyond the renewal date, even if there is no renewal payment made by the customer, as required by state law.

These policies would cancel on the 7th day after the renewal, but there was a period of time when there was a computer glitch (which was eventually fixed), where customers were billed for the 7 days of coverage beyond the renewal, which were not supposed to be billed.

Some customers knew it was not owed, and called the insurance company to correct the error. But I’m sure many people simply paid the bill. Don’t be one of those people.

Another complication arises when you are on an automatic payment plan, like deductions from a bank account, or payroll deduction, which may trigger acceptance of your auto insurance renewal.

Once, I had a customer on a payroll deduction plan, have auto insurance coverage extended over 6 months after the customer changed jobs, moved, and insured with another insurance company.

In the customer’s mind, when the payroll deduction stopped, the auto insurance should have canceled.

The payroll deduction plan from the customer’s employer takes over 45 days to show payments from the customer’s pay check, so it took a very long time for the insurance company to know there was a problem, remove the customer from payroll deduction, mail a direct bill, then mail a cancel notice.

The policy eventually canceled with a large amount referred to collections, when the customer finally contacted the insurance company to explain the customer insured elsewhere a long time ago.

The customer could have avoided a lot of aggravation, and the temporary damage to the customer’s credit, by contacting the insurance company when the customer changed insurance companies.

Simply follow this one rule:

Always contact your insurance company (better to contact your agent) when you wish to cancel your insurance for any reason.

If you receive an unexpected bill, after you have received confirmation of the cancellation of your insurance policy, contact the insurance company (agent) for an explanation. You may still owe money to the insurance company for coverage until the cancel date, or it may be in error. Either way, if you don’t expect to owe anything, you deserve an explanation of your billing.

Here is one secret your insurance company does not want you to know:

Companies often require a certain dollar threshold for it to be worth it for them to refer your account to collections.

For example, owing $5 to the insurance company may be under the threshold, and therefore your account won’t be referred to collections, it won’t be a part of your credit history, and your credit score will not be lowered.

Don’t expect your insurance company to volunteer their dollar limit triggering a referral to collections.

However, if you owe a small amount, call your insurance company, be nice & polite, tell them you want to pay it, but money is really tight right now, and you are worried about it being reported to a credit agency. Your insurance company or agent may tell you about the dollar threshold, to put your concerns to rest. But if you owe the amount, even if it is small, you should pay it.

Has an insurance bill messed up your credit? Tell me about it. Please leave a comment on my facebook page. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.