How to Pay Off Debt in Collections

Expert tip from Thomas

If you are struggling to pay off debt in collections, you could benefit from working with a debt relief company. However, you need to be careful. The debt relief industry has its share of bad players

A debt collection is a delinquent credit account. A debt will typically go to collections once it has been unpaid for around 2-3 months. If you have a debt in collection, you may be hounded by third-party debt collection agencies. The original lender may sell your debt to a collections agency or even hire an agency to collect your money.

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There are consequences to not paying your debts, one of which is being hounded by debt collection agencies to make sure you pay up.

What to do when you find out your debt is in collections?

The share of Americans who have debt in collections is currently hovering at a historic low, according to recent data. While less than 5% of people are estimated to have debt in collections, the average collection amount per person averages more than $1,600.

Collections agencies are tasked with recovering unpaid debts, and they can be persistent in their efforts. However, there are steps you can take to address the situation and work towards a resolution:

• Don’t ignore it. Ignoring the debt won’t make it go away, and it can negatively impact your credit score.
• Contact the creditor.Especially if your debt has only been overdue for a few months, your debt collection may be handled by the creditor (such as your credit card issuer or the bank you got your loan from). Dealing with the creditor before your debt is transferred to another company can be helpful.
• Ask the debt collector to stop contacting you.In most situations, debt collectors are required to stop reaching out to you if you make the request in writing. Stopping these calls and letters won’t get rid of your debt, but it can prevent some anxiety that comes with being contacted repeatedly.
• Consider seeking advice from a financial counselor or attorney if the situation becomes too complex to handle on your own.

Additionally, you should always make sure to keep records of all your communication and payments to protect your rights and creditworthiness.

How to pay off collections online?

Before you agree to paying off debt in collections online, you’ll want to first verify the debt is yours and that the collector is legitimate. Then, the safest way to pay off debt in collections online is by using your bank’s online bill pay service. It’s more secure than giving collectors your information by ACH transfer or personal check. You’ll also want to steer clear of options like paying with a credit card which essentially transfers your debt to a new account.

8 steps to pay off collections

If you have a debt in collections, you can follow these steps to pay it off.

1. Verify that the debt is yours

Don’t make payments until you verify that the debt is accurate and is actually owed by you. Make sure that the stated amount is correct and that the collector is legitimate. You should ask for a validation notice from the collector in question and check them out with the Better Business Bureau or your state attorney’s office.

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Be aware of scams and always verify the debt in question.

2. Check your state’s statute of limitations

You’ll also want to look into your state’s debt statute of limitations, which puts a time limit on how long debts can be actively collected upon. In some states, debts can be reactivated if you make partial payments or contact the collector. Double check that the debt hasn’t been erased through bankruptcy or other methods.

3. Know your debt collection rights

It’s important to know your collection rights. According to the Fair Debt Collection Practices Act (FDCPA), debt collectors are limited in how they can communicate with you. For example, they:

• Can’t contact you at work (if you’ve told them not to).
• Can’t tell anyone else about your debt.
• Can’t call between 9 p.m. and 8 a.m.
• Are prohibited from harassing, threatening, or verbally abusing you.

4. Make a budget

Assess your budget and financial situation to determine the amount you’ll be able to pay on the debt. Look at your take-home pay against your monthly expenses and see how much you’ll be able to allocate towards your debt. If necessary, see where you can save a little extra cash month i.e. cutting back on discretionary items such as eating out and streaming services.

5. Try to negotiate a lump sum

See if your collector will negotiate. The best way to negotiate paying off collections is by offering a lump sum that’s less than what you owe. For example, if your debt is $3,000, you could see if they’d be willing to settle for $2,000 now. If you’re able to pay off a substantial amount of your debt at once, you’ll increase the chances of your collector accepting your offer. Note that if you use a debt settlement company to negotiate this amount, you might face fees from the company. In addition, the debt that is forgiven might be taxable.

6. Create a debt repayment plan

You can also ask the collector if you can pay what you owe back with a payment plan. With a short-term payment plan, you’ll pay your debt back on a fixed schedule with set payments. You could also consider a debt management plan.

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Debt collectors can be scary, but they’re also usually willing to work with you. Ask about repayment options.

7. Stay organized

Make sure to always write down the debt collector’s name, information, and details of what you discussed. If you negotiate a settlement, request a copy of it in writing. Without a name or contract, you’ll have little proof of what you agreed upon.

8. Check your credit report

Your debt will stay on your credit report but should be updated to say ‘paid in full.’ This can take up to a few months. If you notice that it’s taking longer than that, you can reach out to your collector or the three main credit bureaus (Experian, Equifax, TransUnion) to update the information.

Expert tip from Thomas

When someone I know is thinking about enlisting the help of a debt relief company, I stress the importance of scrutinizing the fee arrangement. Never pay a fee prior to receiving debt relief. Moreover, make sure every dollar paid is a fair percentage of the savings generated.

How to deal with debt collectors?

To best know how to handle debt collectors, it’s important that you understand your rights. There are consumer protection laws established to protect you against debt collector harassment. The FDCPA helps protect consumers. Many states also have their own additional laws.

If a collector violates any laws, you can report them to your state attorney general’s office, as well as the Federal Trade Commission and the Consumer Financial Protection Bureau.

Additional resources for dealing with debt collections

If you’re drowning in debt and/or fighting debt collectors, it can be overwhelming. The good news is there’s a lot of help and resources out there, such as:

• Federal Trade Commission (FTC): This government agency works to protect consumers from unfair financial practices and offers a lot of information and advice on debt-related topics.

• Consumer Financial Protection Bureau: Consumer Financial Protection Bureau’s mission is also to protect consumers from unfair practices by banks, lenders, and other financial companies.

• National Foundation for Credit Counseling: If you need help getting out of debt, consider finding a chapter of the NFCC near you. They can help you get out of debt.

• MyCreditUnion.gov: This website about credit unions also has a lot of information and advice on dealing with debt.
• LawHelp.org:If you need help finding a lawyer to sue a debt collector, this website can help.

You can also check your state’s Attorney General website. These sites typically have a variety of information about debt collections and advice for spotting scams.

What to do after paying off debt in collections?

Paying off debt in collections removes a huge financial burden and allows you to breathe a big sigh of relief. However, this isn’t the end of your relationship with that debt collector, and there are a few steps you should take to make sure the account is completely closed and you don’t end up in this situation again.

1. Obtain confirmation of payment

Check your bank records to be sure the payment was processed, and keep a copy of that cleared payment. If you paid with a check, get a copy of the front and back of the cleared check. Or, if you paid by credit or debit card, keep a copy of the statement showing the payment cleared.

Then, ensure you receive a written confirmation from the creditor or collection agency stating that the debt is paid in full. Keep this document for your records. This will help protect you in case there’s ever a question about whether you actually paid the collection.

2. Check your credit report

Wait a few weeks, then check your credit report to confirm that the debt is marked as paid or removed. You can request a free report from the major credit bureaus (Equifax, Experian, TransUnion). If the debt is not accurately reflected on your credit report, dispute the error with the credit bureaus. Provide documentation of payment as proof.

3. Monitor your credit score

Regularly monitor your credit score to track improvements and identify any further issues. Many services offer free credit score monitoring.

4. Build positive credit habits

Focus on building positive credit habits, such as paying bills on time, reducing existing debts, and maintaining low credit card balances. Not only will this help rebuild your credit, but also keep your score high to help you qualify for loans, credit cards, and other financing in the future.

5. Avoid future debt collection issues

Create a budget to manage your finances effectively and avoid future debt collection problems. Consider setting up automatic payments to ensure timely bill payments.

6. Seek professional advice

If needed, seek advice from a financial advisor or credit counselor to help you create a plan for maintaining good credit and financial health.

Bottom line

It’s important to start paying off debt collectors as soon as possible. Ignoring it will only compound the problem. Whether you elect to negotiate/pay a lump sum or work out a payment plan, resolving your debt can put you on the right path toward credit repair and financial success.

FAQs

Why do debts wind up in collections?

Debts wind up in collections for being late. Lenders have different guidelines on the amount of time that payments can be missed before they wind up in collections, but 60 days unpaid is standard.

How does debt collection legally affect you?

You can be sued if you ignore your debt collector. If they win a case against you, they may be able to garnish some of your wages. In addition, collectors may decide to place a lien on your property.

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Debt collection is serious and could lead to costs that are far greater than the debt itself.

Does debt collection affect your credit?

Having accounts in collection can negatively affect your credit score. An account in collections stays on your credit report for 7 years from the time the payment was first deemed outstanding.

How to pay off collections and improve credit score?

It’s unclear whether settling or paying off collection debts will cause a positive FICO score change. That’s because more recent scoring models don’t take accounts with a 0 balance into account, while older models do. Therefore, settling or paying off debts in collections might raise your score under newer models but may not affect your score under older models.

However, your credit score will experience a quick boost if you manage to get the accounts deleted from your credit report entirely. You can request any debts be removed from your credit report after 7 years.

How to get collections off credit report without paying?

There are 2 main ways to get collections off your credit report without paying for deletion. After you’ve completely repaid the debt, you can:

1) Write a goodwill letter requesting forgiveness and removal from the creditor or collector.

2) Create a valid dispute letter that challenges the collection if it’s not legit or is too old to still be on your record.

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It’s possible to have a debt removed from your credit report!

How to get a loan to pay off collections?

Certain lenders may not be willing to extend loans to those who have an existing account in collections, but others may be more flexible. Using a loan to pay off collections can save you fees, interest, and damage to your credit score associated with collections debt. First, figure out what type of loan you’re eligible for, prequalify to see how much you can get, and apply for only the amount you need to pay the collections debt. Then, be sure you have a plan in place to repay the loan balance in a timely manner to avoid further issues.

What are the most common types of debt that go to collections?

While any debt can technically go to collections, some of the most common types of consumer debt include:

• Student loan debt
• Medical debts from physicians and hospitals
• Credit card debt

Other types of debt can include auto and payday loans, cell phone bills, personal loans, and more.

How to pay off medical debt in collections?

When paying off medical bills in collections, it’s best to try and negotiate with lenders to get on a payment plan or offer a lump sum that’s less than you currently owe. The good news is that medical debts don’t show up on your credit report until they’re 6 months past due. And if you pay them during the 180 day grace period, they’ll be removed from your credit report. That means you may have more time to repay the debt before your credit score takes a hit.

What happens if my debt is sold off to another company?

It’s commonplace for collectors to sell debts to other collectors. Even if your debt is sold off to a different company, it’s unfortunately still your responsibility to pay it.