How To Pay Off Debt in Collections
- Know your rights before you pay. Verifying and researching the debt can protect you from overpaying or restarting the clock on old debt.
- A collections account will remain on your credit report for about seven years, but its impact on your credit decreases over time.
- You can get out of collections through debt consolidation, committing to a repayment plan, entering a debt management plan or debt settlement.
Debt can sneak up on you, and if you fall behind on your payments, you could end up in collections. It’s a common problem; approximately 22% of adults have at least one form of debt in collections, according to the latest data from the Urban Institute.
Having an account in collections can be stressful, leading to constant phone calls and letters from debt collectors. But it’s not a permanent sentence; you can rebuild your finances.
Learning how to pay off debt in collections can help you get back on track so you can focus on your future and move forward.
What it means when debt is in collections
If you miss several payments on a loan or credit card, the creditor’s payment recovery department may begin contacting you. Alternatively, the creditor may decide to sell off your debt to a third-party collections agency, and the agency will attempt to recoup the money you owe.
Whether the creditor’s in-house collection department or a third-party agency is handling the account, debt collectors can be aggressive. They may contact you via phone, email, physical letters, and even through social media platforms.
Besides the stress and aggravation of regular calls or emails, under the terms of your loan or credit card agreement, you may be on the hook for late payment fees, interest charges and collection costs, worsening the problem.
Know your rights before you pay
Dealing with debt collectors can be intimidating and overwhelming. However, you have some protections thanks to the Fair Debt Collection Practices Act (FDCPA):
- Right to verification: A debt collector has to give you a debt validation or verification letter when they first contact you or within five days of the initial contact. The letter must include the name and address of the agency, the name of the creditor, how much money you owe, how to dispute the account and your debt collection rights.
- Contact hours: Debt collectors can only contact you between 8:00 a.m. and 9:00 p.m., unless you agree to contact outside of those hours.
- Permission: If you tell a debt collector to stop contacting you at work, via social media, email or text message, the debt collector has to comply.
- No harassment: A debt collector cannot threaten you, use obscene language or call repeatedly to annoy or harass you. They also cannot call or contact you more than seven times within a seven-day period after talking with you by phone.
Steps to take before paying off a collection account
If you’re contacted by a debt collector, follow these steps:
- Verify the debt: Ask the debt collector to send you a debt verification or debt validation letter. Make sure that you recognize the debt, it’s in your name, and you actually owe the balance listed on the letter.
- Review the statute of limitations: Debt collectors have a limited window to collect payment. Once this period is over — the statute of limitations — the debt is “time-barred” and the debt collector cannot sue you for repayment. The statute of limitations varies by the type of debt and state.
- Check your credit: Review your credit report for free at AnnualCreditReport.com to make sure the account belongs to you and is accurately reported.
- Contact your creditor: If you know the account is legitimately yours, contact the collections agency to discuss the account. You may be able to negotiate a payment plan or partial repayment. If you come to an agreement, get the terms in writing.
Strategies to pay off collections
Once you’ve verified that your debt is legitimate and you’re responsible for repaying it, you can focus on coming up with a plan to repay it. You have a few options:
- Ask for help: If you’re focused on getting your finances in order and are disciplined, consider asking friends or family members for financial help. If they’re financially able, they may contribute a lump sum payment, which can help you negotiate with the creditor.
- Negotiate a settlement: In some cases, you may be able to negotiate and settle the debt for less money than you owe. Typically, you’ll need a large upfront sum for this to work; consider selling unused items, picking up a side gig or getting another job to save enough money to make a settlement offer.
- Request a pay-for-delete: Some creditors will agree to remove the account from your credit report if you commit to pay the amount owed. This isn’t a guarantee, and it requires a significant upfront payment.
Alternatives if you can’t pay in full
Paying off your account in collections may require a substantial lump sum payment. If you don’t have that kind of cash available, don’t be discouraged; there may be other ways to handle your account:
- Transfer the balance: If you have a credit card with a low APR, or if you have good enough credit to qualify for a balance transfer credit card, you may be able to transfer the balance of your outstanding debt to a credit card with 0% APR for a certain period, such as 18 months. These offers give you a year or more to pay down the debt without interest.
- Consolidate your debt: If you still have relatively good credit — or if you have a friend or family member with good credit who is willing to co-sign a loan application — consider taking out a debt consolidation loan. You can use the loan to pay off the account in collections. However, be sure you can comfortably afford the payments, or you risk worsening the problem.
- Enter into a debt management plan: Contact a nonprofit credit counseling agency and enter into a debt management plan. The credit counselor will work with your creditors to come up with a payment plan, and they may be able to negotiate waived fees or interest.
- Think about debt settlement: If you’ve exhausted other options and are considering bankruptcy, one other option is debt settlement. With debt settlement or debt relief programs, the debt relief agency attempts to negotiate with your creditors to close out the account for less than the outstanding balance. If they’re successful, they’ll charge you a fee. These programs are risky, and there is no guarantee of success, so it should be the last resort before bankruptcy.
- Consider bankruptcy: If your debt is beyond an amount that you can manage, filing for bankruptcy could be a solution. Doing so would eliminate your outstanding debt, but the long-term consequences to your credit are significant.
How paying off collections affects your credit
If you have an account that is in collections, the delinquent account is reported to the major credit bureaus.
An account in collections can significantly damage your credit. Depending on your credit score before you started to miss payments, your score could drop by 50 to 100 points. The impact can be long-lasting; a collections account will remain on your credit report for seven years.
When deciding how to pay off debt in collections, be mindful that if you do so before the seven-year period is over, it will stay on your credit report — but your credit may improve (depending on the credit-scoring model). As time passes, collections will have less of an impact on your credit.
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