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How to Pay Off Debt in Collections
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If you’ve missed payments on your debt for a significant period of time, typically 180 days, it may be sent to a collections agency. The agency might try a number of tactics to recover 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. By comparing these options, you can choose the best route for your financial situation.
Here’s what to do:
Confirm the debt in collections is really 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.
Consider these 4 strategies for paying off debt in collections
Generally, you’ll have four options in terms of how to deal with debt in collections:
- Offer to settle for a lump sum payment
- Work out a payment plan with the debt collector
- Pay your debt in full
- Wait for your debt to reach the statute of limitations
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 its 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. Because of this, an agency may be willing to negotiate the amount you owe.
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. Make sure you know how the collections agency will report your payment. If it only marks your debt as partially paid and sells the remaining balance to another agency, then you’ll be back at square one.
- 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|
Try these tips for dealing with debt collectors
Being contacted by a debt collector can be stressful. To help you navigate communications, the Federal Trade Commission (FTC) 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.
Use caution when it comes to debt relief services
If you’re feeling overwhelmed by your financial situation, you might want to seek outside help from a debt relief service. While there are legitimate services that can help you, there are also plenty of debt elimination scams. Make sure to do your due diligence before working with a company so you don’t end up high and dry.
Credit counseling organizations can offer advice around managing your debt. You can meet with a credit counselor, who will work with you to develop a personalized financial plan.
While some credit counseling organizations offer free educational materials and workshops, they typically charge fees for counseling services. Even if an organization is a nonprofit, these fees could be steep. Make sure you can afford these counseling services before committing to them.
Debt management plans
Depending on your situation, a credit counselor might recommend a debt management plan (DMP). With a DMP, you typically deposit money each month to the credit counseling center, which then uses your deposits to pay your unsecured debts. Often, you must agree not to take on any additional debt or credit while you’re enrolled in the DMP.
These plans are not for everyone, and the extra expense might not be worth it. If you can come up with a plan for managing your debts on your own, you won’t have to pay a third party to do it for you.
Debt settlement programs
Some companies will assist you with debt settlement, negotiating with a creditor on your behalf to reach an agreement about a lump sum payment. The company may ask you to deposit money into an account, which it will then use to pay off the settled amount.
This approach has a few potential pitfalls, however. For one, you’re paying a company to settle your debt when you could likely do so for free on your own. For another, the company may take months or even years to settle your debt.
During this time, interest charges may continue to accrue and your credit could suffer. If you’re not making any payments during this time, a collector could even bring you to court demanding repayment.
Unfortunately, debt settlement programs can be risky and have no guarantee of success. You might be better off negotiating with a collections agency directly rather than paying a for-profit company to do it for you.
Watch out for debt elimination scams
Scammers tend to prey on people in vulnerable financial situations, so there’s a multitude of debt elimination scams out there. Be wary of any company that charges exorbitant fees (or doesn’t clearly disclose its fees upfront).
You should also use caution if a company encourages you to stop making payments on your debt without explaining the potential negative consequences that can come from that decision. And if a company is promising to eliminate your debt with a special new program, it’s probably a scam. In the world of debt relief, promises that sound too good to be true usually are.
Before working with a company, check it with your state Attorney General or local consumer protection agency. Look for any complaints around the company, as well as whether or not they have a license, if required in your state.
Check out more advice on dealing with debt
Along with figuring out how to deal with debt in collections, it’s also useful to think about how to manage your debts before they end up in default. These tips can help you manage your finances:
Develop and follow a budget
One of the best ways to take back control of your financial situation is to develop a budget. Write down your income and expenses so you have a sense of your cash flow each month.
Start with fixed expenses, such as your rent or mortgage, utilities and car payment. Then create categories for fluctuating expenses, such as entertainment and clothing.
By creating this overview, you can start to recognize your spending patterns. You can identify areas where you need to cut back or strategize ways to increase your income.
If you owe various loans, you can also determine how much you can afford to pay each month and which debts to prioritize.
Get in touch with your creditors
If you’re worried about falling behind on your debts, contact your creditors for help. Let them know that you’re struggling and find out if they can set you up on an alternative repayment plan.
Some lenders will be flexible if you’ve run into financial hardship. Choosing another payment option would be preferable to having your debt go into default or get sold to a collections agency.
Prioritize your secured loans
You might owe a mix of secured loans, which are backed by collateral, and unsecured loans, which are not. The collateral for an auto loan, for instance, is your car; for a mortgage, it’s your house.
If you fall behind on a secured loan, you could lose your collateral. A bank could repossess your car or foreclose on your home. If you’re dealing with multiple debts and not sure which to handle first, consider prioritizing your secured loans so that you don’t lose your valuable assets.