If you don’t pay a debt, it can be sent to collections. If you continue not to pay, you’ll hurt your credit score and you risk losing your property or having your wages or bank account garnished. If you aren’t paying because you don’t have the money, you can look into filing Chapter 7 bankruptcy, consolidating your debt, or going to debt counseling to make a plan to address the debt and avoid further stress.
Written by Attorney Aan Malahia Chaudhry.
Updated July 12, 2023
Having a debt sent to collections is stressful. But ignoring the calls and messages from debt collectors won’t make the problem go away. There are consequences for not paying debts in collection. The severity of the consequences depends on the type of debt and how much you owe.
In this article, we’ll explain what debt collection agencies are, how the debt collection process works, and what the consequences are if you don’t pay your debt. We’ll also talk about debt consolidation, Chapter 7 bankruptcy, and debt counseling, which can help if you can’t pay your debts.
What’s a Debt Collection Agency?
The two parties in a lending arrangement are the creditor and the debtor. Creditors are also called lenders, and debtors are also called borrowers. When you borrow money from a lender, you promise to pay back the debt within a certain time. If you don’t pay the debt, the lender has a few options:
The lender can try to collect the money from you themselves.
The lender can hire a debt collection agency to help them get the money.
The lender can write off the debt and sell it to a debt collection agency.
Debt collection agencies are businesses that specialize in collecting past-due debts. They collect different types of debt, including medical debt, credit card debt, auto loans, business loans, and student loans. Under federal law, the original creditor can send the debtor's account to a collection agency once the debtor is 31 days past due on their payment.
Some debt collectors try to collect debts from borrowers on behalf of the original creditor. These debt collectors generally charge the lender 25%–50% of the amount collected.
Other debt collectors purchase debts from lenders outright and then try to collect the money from borrowers. Buying debt may sound like a strange concept. But debt collectors do it because they are able to pay a low price. If they get you to pay even part of the debt you owe, they can make a profit since they bought the debt for less than its full price.
What Happens When Your Debt Goes to Collections?
To collect the debt, debt collectors will first try to contact borrowers. Using the information the original lender gave them, the debt collector will call and send letters, emails, or text messages. If they can’t reach the borrower, they’ll use more advanced methods, such as hiring a private investigator or using computer programs. But there are federal guidelines that limit what debt collectors can do and how they can operate.
How the Fair Debt Collection Practices Act Protects Borrowers
The Fair Debt Collection Practices Act (FDCPA) is a federal law that applies to debt collection agencies and debt collectors who collect consumer debts. The FDCPA protects consumer borrowers from debt collectors who use abusive, misleading, or harassing tactics when collecting money. The FDCPA lists certain responsibilities for debt collectors.
For instance, debt collectors must inform you that they are representing a debt collection agency and provide you with their contact information. Debt collectors must also send a written debt validation notice within five days of their first contact with you. The validation letter must tell you:
How much you owe
The name of the creditor
That you have 30 days to dispute the debt.
If you dispute the debt, the creditor must verify it and respond in writing. Also, if you ask for the original creditor's information within 30 days the collector must provide it.
One of the rules listed in the FDCPA is that debt collectors aren’t allowed to use unfair tactics when trying to collect money. This means debt collectors:
Can’t harass or abuse you. This includes using threatening language and profane words.
Can only call you between 8 a.m. and 9 p.m.
Must give you an opt-out option if they send you text messages and emails.
Must contact your attorney instead of you if you’re being represented by an attorney.
If a debt collector violates your rights, you can sue them. You must file your lawsuit in federal court within one year of the date of the violation. You can also submit a complaint to the Consumer Financial Protection Bureau (CFPB) or the Federal Trade Commission (FTC). The CFPB and FTC both enforce the FDCPA and offer additional resources regarding the law and debt collection rules and responsibilities.
How Do You Respond to a Collections Notice?
If a debt collector contacts you, the first thing you’ll need to do is verify that the debt is valid and that you owe it. For example, if your name is misspelled on the collections notice, then it’s possible the debt is actually someone else’s. You should also get additional information about your debt such as the amount of debt and the date of your last payment. This is particularly important to confirm that any late charges against you are valid.
Generally, you have 30 days to respond to the notice. Whether you’re requesting more information or disputing the debt, your response must be in writing. The CFPB provides sample letters you can use to respond to the notice. If you don’t respond within 30 days, the creditor can file a judgment against you.
Once you verify your debt and understand your rights under the FDCPA, you should review your budget and make a plan to pay off the debt in collections.
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What Are the Consequences of Not Paying a Debt & Ignoring Debt Collectors?
Interacting with debt collectors can be stressful. But ignoring them and not paying the debt can lead to serious consequences. Your debt moves through a collection process that becomes more aggressive the more you ignore it.
If you ignore their calls and letters, debt collectors can sue you. If you ignore the lawsuit, the debt collector will win by default. If this happens, the court will issue an order (known as a deficiency judgment) for you to pay the debt as well as the debt collector’s attorney and collection fees. The debt collector can collect on this judgment by garnishing your wages or bank account or by placing a lien on any property you own.
A bank account garnishment freezes the money in your bank account and allows the creditor to remove it directly from your account to cover your outstanding debt.
If a creditor gets a judgment lien, they can take possession of the borrower's property if they fail to repay the amount.
Not paying your debts will also damage your credit score. Lenders and landlords use your credit score to see how reliable you are as a borrower. If your credit score is low, it’ll be hard for you to qualify for an auto or personal loan, credit cards, or a mortgage. If you do get approved, your interest rate will be higher, which means you’ll pay more over time. It may also be more difficult to get approved for a rental.
Not paying your debts hurts your credit score, and unpaid debt can negatively impact your credit score for up to seven years, even if debt collectors stop contacting you.
Is It Ever a Good Idea To Refuse To Pay a Debt Collector?
If you have the budget to pay off the debt, you should consider paying the collection agency and resolving the matter as soon as possible. Not only could this save you from endless stressful phone calls, but it can also lessen the negative impact on your credit score. Further, not all debt collectors are willing to settle, and going through a court process will increase the amount you end up having to pay debt collectors because of the added attorney's fees and collecting costs.
That said, there are a few instances when it may make sense to not pay a debt collector.
If the Debt Isn’t Yours or You Don’t Owe It…
The most obvious one is when you don't owe the debt. If you believe that you don’t owe the debt, you can dispute it by sending the debt collector a debt validation letter. Debt collectors are legally required to provide you with validation and proof that you owe them money in response to a debt validation letter.
If You Want To Settle Your Debt…
Alternatively, you may want to try to settle the debt for less. Creditors aren’t required to accept a settlement, but some may consider it.
If the Statute of Limitations Has Expired…
Another reason for not paying a debt collector is if thestatute of limitations has passed. A statute of limitations is like a deadline for bringing a lawsuit. If the debt collector tries to sue you for a debt after the timeframe for filing a lawsuit has expired, you can’t be compelled to pay. The statute of limitations usually starts when you miss a payment. After the time limit runs out, your unpaid debt is considered to be time-barred. If this happens and you’re sued anyway, you can submit this as a defense.
It’s important to review the specific statute for your state, as these vary by state. Some states will also reset the statute of limitation clock if you make a payment or acknowledge your debt in writing. To review your state's specific rules, you can contact your state attorney general's office.
Even if your debt is time-barred, it’s important to remember that it will still be reported to credit bureaus and affect your credit score. Old debt will generally affect your reports and score for seven years from the first delinquency period.
What Are Your Options if You Can’t Pay Your Debt?
If you’re facing debt collection and can’t pay the debt, you're probably feeling a lot of stress. You may also be confused about what your options are. The good news is that there's a way forward.
Here are three things to consider:
Filing Chapter 7 bankruptcy
Working with a credit counseling agency
Exploring debt settlement, a debt management plan, or debt consolidation
File Chapter 7 Bankruptcy
One option is filing for a Chapter 7 bankruptcy, which can clear many debts, including credit card debt and medical debt. Though it you have to do additional work, you can also sometimes discharge student loan debt, especially federal student loan debt. However, child support, alimony, and recent can’t be discharged.
Filing a bankruptcy petition gives you an automatic stay, which tells debt collectors to stop collecting. Once your debt is discharged, the debt collectors will be legally barred from contacting you regarding your dischargeable debts.
Work With a Credit Counseling Agency
You can also work with a certified credit counselor through nonprofit credit counseling agencies. Counselors can explain your options and help you evaluate your financial situation and develop a budget. They can also help you learn more about debt settlement and its pros and cons. Some also provide low-cost debt management programs for unsecured debts like credit card debt.
Under a debt management program, you’ll have a more manageable payment plan, often with a lower interest rate. By using a debt management program you won’t have to deal with collection calls. The fees for the debt management program depend on the complexity of your situation and the specific agency.
Consider Debt Consolidation
If you have multiple debts, you may want to consider debt consolidation which combines multiple debts into a single debt with a single payment. If you can consolidate your debts at a lower interest rate, this can be a good way to manage your payments and reduce the stress of having to worry about multiple due dates or missing a payment. Generally, debt consolidation companies charge a fee for their service and not all creditors will agree to work with them.
A Final Note of Caution About Dealing With Debt Collectors
When a debt collector reaches out, you should confirm the debt is valid before making any payment. One way is to review your credit report for any mistakes. Under federal law, you can get one free annual credit report per year.
You should also be wary of debt collection scams. Here are a few warning signs to look out for when you’re contacted by a debt collector:
They may ask you for information they should already have.
They won't share their company details.
They request that you pay them through untraceable payment methods.
They demand immediate payment.
If you’re facing debt collection, it’s important to understand how the process works and what options you have. If you ignore a debt in collections, you can be sued and have your bank account or wages garnished or may even lose property like your home. You’ll also hurt your credit score. If you aren’t paying because you don’t have the money, remember that you still have options! Look into Chapter 7 bankruptcy, debt consolidation, and debt counseling and make a plan to address the debt and avoid further stress.