Here's how to pay off a debt in collections: Step 1: Know Your Rights Step 2: Respond to the Debt Collector or Collection Agency Step 3: Verify the Debt Step 4: Check the Statute of Limitations in Your State Step 5: Review Your Budget & Make a Payment Strategy Step 6: Get Your Agreement in Writing Step 7: Check Your Credit Report If you're struggling to repay several debts, it may be time to look into Chapter 7 bankruptcy. Filing Chapter 7 stops all collections activities (thanks to the automatic stay) and can erase most types of consumer debt.
What Is Debt Collection?
Debt collection is the effort a lender or debt collection agency makes to get a delinquent borrower to repay some or all of the debt they owe. When a debt goes into collection, the borrower may be contacted in several ways, including telephone calls, written correspondence, and even notice of lawsuits being personally served in some cases.
When Do Debt Collection Agencies Get Involved?
When a borrower gets far behind in their debt payments, the lender usually sends their account to a collections department. This typically doesn’t happen until the borrower is at least three payments behind — sometimes even more than that. But for most lenders, at a certain point it's more profitable to write the debt off and turn the account over to a collection agency than to keep trying to get the money back.
If your lender has been trying to reach you because your account is delinquent, it’s wise to talk to them to see whether you can work out an arrangement instead of letting your account go to collections.
If you don't, your lender will likely eventually sell your debt to either a collection agency or a company that buys debts. This will create a blemish on your credit report and lower your FICO or credit score. Any late payments or missed payments leading up to collections will also hurt your credit score.
What Types of Debt May Go To Collections?
Virtually any type of debt can be turned over to a debt collection agency, including:
Medical bills and other types of medical debt
Car and auto loans
Yes, even the IRS has turned over a large number of its delinquent accounts to aggressive debt collectors. This is in the hope that they can capture at least a portion of what’s owed to them. Taxpayers who are delinquent can expect to hear from one of these agencies sooner or later.
How Does Debt Collection Impact Your Credit Score?
Having an account sent to collections is never a good thing, especially when it comes to credit reporting. In most cases, your credit score will drop when this happens, even if it’s the first time. And this negative item on your credit report will stay there for the next seven years.
About a third of your credit score is based on your payment history. If you've missed several payments or are chronically late late payments, this can seriously hurt your score. Having a lower score makes it harder for you to qualify for other types of loans or credit. You'll also be charged higher interest rates than other borrowers with higher credit scores when you take out a loan or get a new credit card.
In some cases, having a low credit score can hurt your chances at employment and housing, too. Most banks and insurance and investment companies run credit reports on anyone who applies with them. And most landlords will run a credit check on prospective tenants to see whether they have a stable payment history.
Some good news: Newer credit scoring formulas being used today such as VantageScore 4.0 and FICO 9 will not reflect an account that is sent to collections if the delinquent debt is paid in full.
Can You Get a Collection Account Removed From Your Credit History?
There are a few ways you can get a collection account off of your credit report.
First, check your credit report for inaccurate information. When debt accounts get bought and sold to debt collectors, errors are more likely to appear on your credit.
If any information isn't accurate, you have the right to dispute it. The credit bureaus must usually respond within 30 days of the dispute being filed. If they do not, then that information can automatically be removed from your report.
Even if the debt in question does belong to you, there may be late payments assessed or other details that are not correct. If the credit bureau cannot validate these facts, then that information must be removed from the report.
The borrower can also write a polite letter to the credit bureau or the creditor asking for a goodwill removal of the debt from their credit history. Some bureaus and lenders may be willing to grant this if the borrower can show a good reason for asking for this.
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How Do You Deal With a Debt in Collections?
If you’re contacted by a debt collection agency, start by carefully checking all of your records against what the debt collector tells you. You’ll want to verify that the debt is valid and that it’s yours. You should also check the amount of the debt, the date the last payment was made, the date or dates that the debt was incurred, and the total balance of the debt.
Step 1: Know Your Rights
Whether or not you owe the debt a debt collector is calling about, the Fair Debt Collection Practices Act (FDCPA) protects you. This law restricts debt collectors from calling before 8 a.m. and after 9 p.m. locally. They also cannot use any form of threats, intimidation, obscenities, or coercion to collect their debts.
Your state or locality may also have laws that govern debt collection. Visit your state attorney general or local website for more information on this if you have any questions.
The Consumer Financial Protection Bureau can also usually tell you about additional statutes that apply to you. You can also access resources from the Federal Trade Commission. And beware of debt collection scams; some unscrupulous predators try to pose as debt collectors to get you to pay them.
Step 2: Respond to the Debt Collector or Collection Agency
In most cases, you’ll have about 20 to 30 days to do this. If you fail to respond within that time frame, the creditor can bring legal action against you. If they sue you and win, the creditor can garnish your wages, freeze your bank accounts, or take possession of/file a lien against your personal property.
Whatever you do, don’t ignore the notice your creditor sends you warning of the coming hearing. If you don’t show up to the hearing, the judge will automatically rule against you. You may also lose the right to dispute the debt from then on, even if it proves to be erroneous.
Step 3: Verify the Debt
You can send a written request (a debt validation letter) asking the debt collector to provide detailed information about the debt and proof they're allowed to collect the debt from you.
When verifying the debt, pay attention to the amount of debt and the payment history, but also look at the personal information associated with the account.
Verify that your name and the names of any other cosigners are correct. If your name is misspelled, the debt may not actually belong to you. For example, you could have been a victim of identity theft, which is rampant in the U.S. If any part of the information that the collection agency tells you is wrong, then you can use the discrepancy to dispute the debt.
In many cases, your information has been passed from your original creditor to another debt collection party, and this is where mistakes happen. Make sure that the information they give you is correct. You can double-check the information against your credit report. Remember that you can download a free credit report for each of the three credit bureaus once a year.
Step 4: Check the Statute of Limitations in Your State
The statute of limitations is the length of time the creditor or debt collector has to sue you for an unpaid debt. If the debt is past the statute of limitation, it's considered time-barred and you can't be sued for it.
These timelines vary by state and type of debt, so do some research to see when the statute of limitations is up for the type of debt the collector is trying to recover.
In some states, if the statute of limitations for the debt has lapsed but you admit to owing the debt or you make a payment toward the debt, it can restart the timeline. Also, some debt collectors may know the debt is old debt but try to collect money from you anyway.
By law, debt collectors can't threaten to sue you for an old debt. If they do, you may be able to sue the debt collector for damages.
Step 5: Review Your Budget & Make a Payment Strategy
At this point, it's important to carefully review your budget to see what kind of payment you can make. If it's not possible to pay the debt in full, ask the debt collector if you can work out a payment plan. You may also be able to negotiate a lower debt amount with your creditor if you're able to make a lump-sum payment. Finally, if you truly can't pay the debt and you also have other debts you're struggling to repay, you may want to consider filing bankruptcy to get financial relief. (See more on this option below.)
Pay the Debt in Full
For most people, this isn’t possible. If you had the money to pay, you would have paid before your account went to collections. But if you have come into some money since that happened, then paying your debt in full is probably the best option. Doing so will help clear up your credit report, boost your credit score, and stop contact from the collection agency.
Make Payments Over Time
his is probably the most commonly used option because most people can make at least a small payment every month. This is generally considered to be the next best option if you can't repay the debt in full with a lump-sum payment. But making payments can also give the debt collection agency more time to sue you, especially if you miss a payment or two.
Make a Debt Settlement Offer
The third option is to settle your debt for a lesser amount.
Debt settlements can be difficult to negotiate because creditors will want to get as much as they can from you. You will most likely have to show the debt collector some financial records that prove you are unable to pay the full amount and can only cover the proposed settlement amount.
If you find yourself in this situation, a qualified credit counselor can help. Credit counseling can also help you to create a workable budget and stay on track with your overall finances. A good credit counselor may also help you with debt consolidation, paying off old debts, or making partial payments instead of full ones until you get back on your feet.
Step 6: Get Your Agreement in Writing
Regardless of which option you choose, document each payment you make and the terms of any agreements you reach with your collectors. It's also helpful to write a summary of any phone calls you make or receive from creditors or debt collectors. Also, save all correspondence that you get from your creditors. You can use this documentation as evidence in court if necessary.
Step 7: Check Your Credit Report (Again)
Once you make payment arrangements or negotiate a settlement with the debt collector, check your credit report again. If you're on a payment plan, ensure that the payments you're making are being documented and reported accurately. If they aren't, contact your debt collector immediately.
What if I Can’t Pay the Debt Collection Agency?
If you're unable to repay any of your debt, you’ll likely benefit most from Chapter 7 bankruptcy, which eliminates most debts, including credit card debt, medical bills, and payday loan debt. A Chapter 7 bankruptcy will stay on your credit report for 10 years and will initially hurt your credit. Though with some effort, you can start improving your credit score within months of filing.
Of course, there are some types of debts that can’t be discharged by filing for bankruptcy. Back taxes usually cannot be eliminated, except for some old tax debts. And you must continue to pay any type of court-ordered payment, such as child support, alimony, or any type of legal restitution even after you file bankruptcy.
You can have government-backed student loan debt discharged but you'll need to file an adversary proceeding and qualify for a hardship exception.
If you are being contacted by debt collection agencies or other types of debt collectors, then you have several options to choose from to protect yourself. But don’t ignore those letters or phone calls just because you can’t pay the debt right now. Keep in contact with your creditors and let them know where you stand so that they know that you are actively trying to work with them.