How to Pay Off Debt in Collections
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.
But there is a way out! You just need to understand how to pay off debt in collections online as it can be a convenient and efficient way to take care of outstanding debts. 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:
Expert tip from Thomas Brock: “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.
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.
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. 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, 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.
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 Brock: “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.”
What to do when you find out your debt is in collections?
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 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.
Co-signer loan or debt consolidation loan to pay off debt in collections
A cosigner loan can be a good option to pay off debt in collections, but it depends on your specific situation. Here are some things to consider:
- The role of a cosigner: A cosigner is someone who agrees to take responsibility for the loan if the borrower defaults. Having a cosigner can make it easier to qualify for a loan, especially if you have bad credit or a low income.
- The interest rate: The interest rate on a cosigner loan may be higher than on other types of loans, especially if you or your cosigner have a lower credit score. Be sure to compare rates and terms from different lenders before deciding.
- Your ability to repay: Before taking out a cosigner loan, make sure you can afford the monthly payments. If you default on the loan, it will not only harm your credit score, but it could also damage your cosigner’s credit score and financial stability.
A debt consolidation loan can be a good option to pay off debt in collections, but, again, it depends on your specific situation. Here are some things to consider:
- The interest rate: A debt consolidation loan may have a lower interest rate than the rates on your existing debts. This can save you money in the long run and make it easier to pay off your debt.
- Your ability to qualify: To qualify for a debt consolidation loan, you typically need a good credit score and a stable income. If you have bad credit or a low income, it may be difficult to qualify for a loan with favorable terms.
- The fees: Some lenders charge fees for origination, prepayment, or other services. Be sure to read the fine print and understand all the fees before taking out a loan.
- Your budget: Before taking out a debt consolidation loan, make sure you can afford the monthly payments. If you default on the loan, it could harm your credit score and make your financial situation worse.
Before you investigate either of these options if your debt is already in collections, it may be possible to negotiate a settlement with the creditor. This could be a better option than taking out a loan and paying interest.
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: Their 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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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