Debt Consolidation

How to Pay Off Debt in Collections

There are two stages of collections generally. Once you’ve missed payments for 30 to 90 days, your creditor — whether it’s your bank or the utility company — will likely send your debt into collections. First, the creditor will use their own collections team to try to recoup the debt by calling you and sending letters. If you fail to make payments and you reach the 180-day mark, the creditor is likely at that point to charge off your account and sell it to a third-party debt collector.

At this point, your credit will likely be severely damaged, and you are likely no longer dealing with your original creditor because your debt now belongs to a collection agency.

Where can you go from here? We’ll cover the best ways to pay off a debt in collections in this post.

Strategy #1: Settle your debt with a lump-sum payment

When you’re severely delinquent on a debt, you actually have a bit of bargaining power. The collections agency may be willing to settle your debt for less than you owe if you can make a lump-sum payment. Why? Because collections agencies purchase your debt from your original credit at a steep discount, often pennies on the dollar and they make a commission on how much they’re able to collect from debtors, so they are incentivized to get you to pay. A debt consolidation loan can be an option if you’re stuggling to find money.

“They may buy a $1,000 collection bill for $100, so even if they settled a debt for $500, they still made a $400 profit,” said Thomas Nitzsche, the spokesperson and credit educator at Money Management International, a nonprofit credit counseling company.

Depending on who the collection agency is and how motivated they are to settle it, you may be able to get away with paying anywhere from 50% to 80% of what you owe. The longer your debt is in collections, the more substantial a discount on the debt you can expect to get.

But there is one caveat: If you can’t come up with the amount you agreed to settle for, you risk facing more trouble.

“A lot of times I’ve seen people [where] they get called, they feel like they’re backed into a corner, they cut a deal and then they scramble to figure out, ‘Well, where am I going to come up with the money?’” said Chris Dlugozima, a financial wellness expert at GreenPath, a nonprofit debt and consumer credit counseling that operates in 50 states. “If you can’t make good on it, then not only is the deal off the table, but now you’ve got the collector hopes up, and so they might become more aggressive in their collection.”

Dlugozima said that you’re going to negotiate a settlement over the phone initially, and before you come to an agreement, you need to make sure you have a decent amount of money available to make good on that.

There are for-profit debt settlement companies that may be able to negotiate with creditors on the money you owe for less than full balance repayment — for a fee. But beware of risks associated with such services. You can easily negotiate with lenders yourself without going through a third-party service. Also, some creditors will refuse to work with these types of companies, so make sure you don’t pay for a service before you check with your lender to see if they will entertain discussions with third parties.

Debt Settlement
Pros of settling a debt for less
Cons of settling your debt
You can possibly knock off a substantial portion of your debt balance. You may save the most money using this strategy, compared with other methods. You may need to have money saved up or you need to sell something so that you’re able to satisfy the settlement. Some people may not able to repay a substantial amount of debt in a lump sum.
You can get out of debt faster this way than by making monthly payments. Be very wary of debt settlement companies. Many charge high fees and are not able to deliver their promises when you can do the same for free. It may end up costing you more money to have their assistance.
You can avoid bankruptcy. If the debt collection agency forgives $600+ of your debt, you may have to pay taxes on the forgiven amount.


It keeps the debt from escalating to the next step in the collection process — being sued by the debt collector. Your creditor may refuse to settle.


Strategy #2: Negotiate a payment plan

If you cannot afford to make a lump-sum payment, the next best thing to do is to negotiate a payment plan with the debt collection agency. Usually, collectors allow debtors to pay off a debt in three to four large payments over a three- to four-month period; a maximum payment period would be six months, experts say.

While you can usually get a bigger discount if you settle your debt in one lump-sum payment, it’s certainly worth asking for a payment plan especially if you have a hardship.

“Let’s say you have $4,000 in debt and you agree to a $2,000 settlement, the debt collector may accept a $400 or $500 payment for four months, if you’re not able to pay off $2,000 at once,” Nitzsche said, giving an example.

Most accounts that are in collections are not accruing an interest rate anymore. Usually, debt collectors are just trying to collect on the principal. However, some debts do continue to accrue interest, and in those cases, your debt balance may grow if you spread out your debt payments, Dlugozima said.

Negotiating a payment plan
It may be easier for you to spread out your debt payments than making a lump-sum payment at once. Your settlement discount may not be as good if you settle for a lump-sum payment.


While the agreement is in effect, most collectors will stop contacting you. If you have an agreed payment plan but you can’t stick to that agreement, you are back to square one — you may not be able to knock off any money at the end.
It keeps you from being sued. The balance on your debt can continue to grow if interest and penalty fees continue to be charged by your creditor.
You may still get a discount on your debt balance.


#Strategy 3: Pay your debt off in full

You may also choose to pay off your debt all at once, without having to negotiate for a lower amount. However, credit counselors don’t recommend debtors to take this route without trying to get a settlement first.

“You might as well try to do a settlement and save some money,” Nitzsche said. “As far as the credit score is concerned, it’s not going to matter whether you paid in full at that point or whether you settle it.”

Depending on the credit score being used, in some newer credit scores, such as FICO 9, either paying off or settling a debt will improve your credit score, Dlugozima said, but in a lot of the older credit scores, paying off a debt in full doesn’t really have much of an impact.

However, Nitzsche said, your credit report will look better if someone reviews your ratings when a debt is marked “paid in full” than if it’s settled.

For instance, if you are applying for a mortgage in the next few years and you want your credit to look as good as possible from a manual review, you may choose to pay off your debt in full. Or, if you have an employment opportunity that requires a security clearance, the employer may prefer a clean credit report. “They could be more willing to forgive or overlook it if it shows it’s paid in full,” Nitzsche said.

Another scenario where it makes sense to repay the whole balance in full is if you have a small amount of debt in collections. It may be worth going back and forth to negotiate for a smaller amount. But you want to communicate with your debt collector just to make sure the amount you’re sending is still an accurate balance.

However, when you owe a significant amount of money, in most cases, it’s worth investigating the settlement option.

Paying the debt off in full
Your debt will be marked as paid off as opposed to settled on your credit report. You may be able to save more by negotiating a lower settlement amount.



It may improve your credit score, depending on the kind of debt and the credit score report being used. Your credit score may not necessarily improve because of this.

Strategy #4: Do nothing at all

Each state has a statute of limitations of a certain number of years to sue for debt in collections. Once the statute of limitations expires, the lender can no longer take legal action against you over unpaid debts. California, for instance, has a four-year limit to sue for debt collection.

If you are nearing your state’s statute of limitations, especially if the derogatory mark is about to drop off your credit report after seven years past due, it’s probably wise for you to wait until you pass the time limit. This is why experts typically recommend paying newer debts off first before you pay off old debts. The damage has been done with those older accounts, and you won’t really bounce back your credit score by paying them off. On the other hand, if you have new debts in collections or start missing payments, you score could take an additional pounding.

The downside to this approach is that you run the risk of being sued by the collector in court if the statute of limitations doesn’t expire. In a lawsuit, the creditor can ask the court to garnish your wages if they get a judgment against you.

Pay attention to your old debts in collections. It’s important for you to know when you meet the state’s statute of limitations.

“Let’s say someone is right at the statute limitations and then the collectors call them and say, ‘Just send us a good faith payment of $10,’” Dlugozima said. “By doing that, It will restart the clock, reset the statute limitations.”

For those who live solely on government benefits, such as Social Security, private debt collectors can’’t force you to repay your debt even if they sue you in court. A U.S. Department of Treasury rule requires banks to protect certain federal benefits from being frozen or garnished if they are directly deposited into your account. If you fall into this camp, know that you are not obligated legally to repay the money you owe.

Do nothing at all
If you have hit the point where you can’t be taken to court for debt collection, you can prioritize the newest debts and leave the oldest accounts to lapse. Your collector may sue you to collect debt if you haven’t yet met the state’s statute of limitations.



You may not have to repay old debt that has passed the statute of limitations. If you are near the state limit but make a payment, your restart the debt collection legal period again.
Your credit report is not going to get better in the short term.

Bottom line

Try to avoid letting your debt be sent into collections in the first place. But if it goes into collections, it’s critical for you to know the amount of debt you owe and how long it’s been in collections. Be honest and realistic about your financial ability. Go forward with the solution that suits your own financial situation the best. If you’re going to settle a debt, you want to get everything in writing before you pay; you want the letter to specify the amount that you agreed upon, the due dates of when the payment is to be received by and any reference to the specific accounts.

If you have problems with your debt collector, or if you have validated that you do not legally owe the debt and have sent a cease and desist letter to the collections agency, report to your state attorney general’s office, the Federal Trade Commission and the Consumer Financial Protection Bureau.


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