At a Glance
Having debt in collections can be a very stressful experience. Your credit score will take a hit, creditors may contact you incessantly, and you may feel like your financial issues are taking over your life.
However, all is not lost. By understanding what to do if your debt goes to collections and the best ways to pay it off, you’ll be able to achieve debt-free living with nary a collector in sight. Grab your debt payoff calculator and let’s get started.
Here’s what we’ll cover:
Debt Collection Definition
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.
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:
Other types of debt can include auto and payday loans, cell phone bills, personal loans, and more.
The Best Way 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.
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.
2. 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.
3. 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.
4. 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, which helps set up monthly payments to be paid to your collectors. Make sure to consider debt management plan pros and cons to see if this is a good fit for you.
5. 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.
6. 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.
How to Handle Debt Collectors
To best know how to deal with debt collectors, it’s important that you understand your rights. There are consumer protection laws established to protect you against debt collector harassment. The Fair Debt Collection Practices Act (FDCPA) helps protect consumers. Many states also have their own additional laws. Some of your rights include:
- If you don’t want to be contacted at work and inform your debt collector of this via written letter, they must stop.
- Collectors can only call between 8am and 9pm and can’t call multiple times a day.
- Collectors can’t threaten or harass you.
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.
Debt Collection 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.
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.
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 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.
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.
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.
The Bottom Line: Paying Off Debt in Collections
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.