How to pay off a debt in collections

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When you have debt in collections, your credit score suffers and new opportunities for financing become limited. Plus, you’re likely to receive ongoing calls and letters from debt collectors, adding stress to your everyday life. Rather than letting your financial issues continue to grow, create an actionable plan for paying off collections in a way that best works for you.

What is debt collection?

Debt collection is the process where companies attempt to collect unpaid debts from borrowers. A debt goes to collection when it’s unpaid for an extended period of time. Once a bill reaches a certain period of delinquency, the original creditor may sell it to a collection agency or simply hire one to collect the balance on its behalf.

Depending on the type of debt that’s owed, the time frame for an overdue bill going to collections typically ranges between 90 and 180 days. The collection agency can then attempt to collect the debt through letters and phone calls.

Does debt collection affect your credit?

Any payment to a creditor that is at least 30 days late can appear on your credit report as a negative entry, with subsequent entries tacked on every additional 30 days of nonpayment. Each of these entries hurts your credit score. When the debt is transferred to collections, the account is flagged with a collection status. While the exact point drop varies from person to person, expect a major decrease in your credit score. Accounts in collections stay on your credit report for as long as seven years from the original delinquency date.

How to pay off debt in collections

Before paying off debt in collections, follow these steps to make sure you cover all the necessary bases.

Confirm the debt is yours

Don’t make any payment to a collection agency until you confirm that the debt is truly yours. Check your records to ensure that the quoted balance is correct and contact your original debtor to make sure you’re working with the true collection agency. Mistakes happen, so confirming that the debt is your responsibility is a necessary first step.

Check your state’s statute of limitations

Each state has its own statute of limitations, which sets a maximum time limit during which the debt can be actively collected upon. However, in some places, it’s possible to reactivate the debt if you contact the collection agency or make a partial payment. Confirm this time period before you take further action in paying off debt in collections. Also, make sure the debt hasn’t been discharged through bankruptcy or any other means.

Set up a payment plan or negotiate a debt settlement

Once you know that the debt is accurate and valid, it’s time to figure out your payment strategy. Here are three of the best ways to pay off collections:

  1. Offer a lump-sum payment. Paying the entire amount owed is a fast way not only to settle your debt, but to settle it in full. That gives your credit score a faster boost and requires no negotiation. The downside to making a lump-sum payment on your debt in collections is that you need the full amount in cash. If you don’t have the money in savings to pay, consider taking out a debt consolidation loan.
  2. Start a payment plan. Most collection agencies are willing to set up a payment plan to help pay off a debt over a fixed period of time. However, it’s important to get all of the details in a written agreement before making any payment. Once the payment plan is finished, the account is marked as paid in full on your credit report. Just be realistic with how much you can afford so you don’t max out your budget and set yourself up for more debt in the future.
  3. Settle for less. You can also try negotiating a settlement. It’s faster than a payment plan and can potentially save you money. The downside is that you’ll need to offer a lump sum that you can actually pay, and there’s no guarantee that the collection agency will accept your deal. Your credit score may also suffer more if you have a debt marked as settled. If you do go this route, get any agreement in writing before you pay anything.

Be aware of debt collection scams

Debt collection scams are real, and scammers may use anxieties about debt in order to pressure you into payment. Watch out for supposed debt collectors withholding information, calling you late at night, threatening jail time or asking you to pay with a prepaid card.

Confirming both your debt and the collection agency’s right to your payments goes a long way in protecting you against potential fraud. However, there are a few other precautions you should always take, even after coming to an agreement with the debt collection agency. First, never give anyone access to your bank account. Instead, pay with certified funds. Also keep detailed records of your payments along with your original agreement.

What to do after you make your last payment

When you finish your payment plan or pay a lump sum, ask the collection agency for a letter of completion from a company signatory. Then check your credit reports to make sure the account has been accurately updated — but note that changes may not be reflected for 30 days. Even after everything is updated correctly, keep your records in a safe place in case any issues arise later.

The bottom line

Paying off collections isn’t an overnight process, but it can be a permanent solution to getting rid of problematic debt. If you’re having trouble paying off a debt in collections on your own, you may consider taking out a debt consolidation loan, which won’t eliminate your debt, but which may make paying it off cheaper and simpler.

No matter which payment option you choose, take the extra steps of confirming your debt and getting the appropriate paperwork to protect yourself both now and in the future.

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