How to Pay Off Debt in Collections
When debt goes unpaid for a significant period of time, typically 90 to 180 days, it may be sent to a collections agency. The agency might try a number of tactics to recuperate the debt, from aggressive phone calls to court orders.
You have a number of options for paying debt in collections, from settling the debt to working out a payment plan. Compare your options, and choose the best route for your financial situation.
What happens when a bill goes to collections?
If you miss a payment on a loan or credit card, your balance won’t immediately go to collections. Thirty days after your missed payment, the creditor to which you owe money will report your delinquent account to the credit bureaus, and your credit score may drop significantly. The creditor may alert the bureaus again after 60 days of nonpayment, which would result in another hit to your credit.
A debt that goes unpaid for a significant amount of time will eventually end up in collections. Typically within the first 90 days, the creditor to which you owe the debt will try to recuperate the cost by collecting the debt themselves. After 90 to 180 days, the creditor may sell the debt to a collections agency, which will use various tactics to try to get you to repay the debt, including:
- Calling you or your spouse daily, possibly at work (unless you say you cannot take calls while working)
- Sending frequent letters, emails and even text messages
- Suing you over the debt, resulting in wage garnishment
Within five days of first contacting you, the collector has to send you a written validation notice that outlines how much you owe, the name of the creditor to which you owe the debt and what to do if you don’t think the debt is yours.
After a certain number of years, depending on the state in which you live and the type of debt you carry, your debt will meet the statute of limitations. You can’t be sued over an expired debt that has met the statute of limitations, but debt collectors can still seek payment on these financial obligations, depending on where you live.
Before paying, confirm the debt is yours
If you don’t think the debt is yours, send the collector a letter saying as much. You could ask for verification of the debt, such as a copy of the bill you owe. Make sure you request verification of the debt within 30 days of getting the validation notice.
If you’re unsure of debts that are out in your name, you can request a free copy of your credit report from AnnualCreditReport.com from each of the major credit bureaus once every 12 months.
4 strategies for paying off debt in collections
1. Offer to settle for a lump-sum payment
If your debt has been sold to a collections agency, the agency bought your debt for a fraction of what it’s worth in the hopes that you would pay more than they paid your creditor. Offering to pay in a lump sum will ensure the agency gets their money back, compared with entering a payment plan that you may not honor. It’s more profitable for a debt collection agency to collect the money in a lump sum rather than to keep calling you over a long period of time.
Follow these tips for how to negotiate with collectors on unsecured debts:
- Determine how much you can pay. If you agree to an amount you can’t pay, you’ll end up back at square one.
- Include your credit report in negotiations. You may be able to get the debt collector to mark the debt as “satisfied in full” rather than “settled,” which will reflect better on your credit report.
- Offer to settle the debt in writing. This is the best way to ensure everything is documented properly.
The debt settlement letter should include the following: your account number, the current balance, the proposed settlement, the deadline for the settlement payment and why you want to settle the debt.
|Pros of settling a debt||Cons of settling a debt|
|You can often settle for much less than what you owe the creditor||Settled debt may appear on your credit report, which can hurt your score|
|You’ll prevent legal action, including a lawsuit and wage garnishment||You’ll have to come up with the lump-sum amount to pay the collector|
|You’ll get a fresh start without debt collectors hounding you for money||You may need to pay taxes on the debt that’s forgiven, depending on the amount|
2. Work out a payment plan with the debt collector
Debtors with a significant amount of debt in collections may not be able to make a lump-sum settlement payment. The next best option may be to work out a payment plan with your debt collector, although you probably won’t get as steep of a discount on your debt as you would by paying in a lump sum.
Most debts in collections do not continue to accrue interest, so you may be able to work out a payment plan in which you only pay the principal balance. But if your account does still accrue interest, then your debt balance may grow if you spread the payments out over a longer period of time.
|Pros of entering a payment plan||Cons of entering a payment plan|
|You won’t have to come up with a lump sum to pay the debt||You likely won’t get a discount that’s as high as if you pay in a lump sum|
|You’ll prevent legal action, including a lawsuit and wage garnishment||If you can’t stick to your payment plan, you become delinquent again|
|You may still get a discount on your debt balance||If your debt continues to accrue interest, then you’ll pay more than what you owe over time|
3. Pay your debt in full
While it shouldn’t be your first option, you could potentially pay the debt in full to close the account and start anew. The sole benefit of paying your debt in full versus trying to negotiate is that it will reflect better on your credit report.
However, as mentioned earlier, when you settle the debt for a lump sum, you may be able to negotiate with the debt collector to have them report your account as paid in full rather than settled. This means you could save money and still get the benefit of a positive mark on your credit report. If you have a significant amount of debt in collections, it’s worth trying to negotiate a lump-sum settlement.
|Pros of paying a debt in full||Cons of paying a debt in full|
|Your debt will be marked as “satisfied in full” as opposed to “settled” on your credit report||You’ll end up paying the full debt when you likely could have settled and paid less|
|You’ll prevent legal action, including a lawsuit and wage garnishment||You’ll have to come up with the entire lump-sum debt balance|
|You’ll get a fresh start without debt collectors hounding you for money||There’s no guarantee that you’ll see your credit score improve|
4. Wait for your debt to reach the statute of limitations
Even debt may not stick around forever. Eventually, your debt will expire under the statute of limitations, depending on the state in which you live and the type of debt you have. (The exception is federal student loan debt, which doesn’t have a statute of limitations.) Debt that is beyond the statute of limitations is known as time-barred debt.
While you can’t be sued over expired debts, a debt collector can still contact you to try to get you to pay the debt. You can send a letter to the collector demanding that communication stop, which the collection agency will have to honor.
Finally, not paying your debt will still have a negative effect on your credit score, making it harder to get loans and credit in the future. An account you didn’t pay off in collections can last on your credit report for up to seven years.
|Pros of not paying debt in collections||Cons of not paying debt in collections|
|You may not have to repay old debt that has passed the statute of limitations||The debt collector may sue to collect debt before it reaches the statute of limitations|
|You can prioritize newer debts while the oldest debts expire||Debt collectors can still try to collect a debt that’s expired|
|Your wages cannot be garnished if you cannot be sued on an expired debt||Your credit score will continue to suffer in the meantime|
Tips for dealing with debt collectors
Being contacted by a debt collector can be stressful. To help you navigate communications, the Federal Trade Commission recommends following these tips when dealing with a debt collector:
- Keep a pen and paper near the phone when a debt collector calls, so you can take notes.
- Write down the debt collector’s name, company, address and phone number, plus the time and date you talked.
- Ask for a written validation notice. Don’t make any payments to the debt collector until you get the notice and confirm the debt is yours.
Federal law prohibits debt collectors from being abusive, unfair or deceptive under the Fair Debt Collection Practices Act (FDCPA). If a debt collector is harassing you, threatening you or trying to collect fees or interest on top of what you owe, for example, then they are breaking the law and you should hang up and contact the FTC.