Finding out that a debt has gone to collections can be scary, but it doesn’t have to be. If you start to receive calls from a collection agency, know your rights and responsibilities when it comes to handling the debt and you will be able to move forward with a plan.

Knowing what to do when you get a call from a collection agency can equip you to handle the situation with ease and move on with good financial health and a calm mind. With a few simple steps, you can make a plan that works for your situation so that you can either pay off the debt immediately or have a clear plan for doing so. Here’s what you need to know about debts in collections.

What is debt collection?

Debt collection is when a third party — often a debt collection agency — works to collect unpaid debts owed to another company or organization. The debt collections agency will contact the borrower directly to attempt to get the debt paid. A debt goes to collections when it’s unpaid for an extended period of time, usually at least several months. When you don’t pay a debt owed to your creditor (debts can be anything from medical bills to credit card payments), they will often sell it to a debt collection agency after a certain period of time in order to collect the balance on their behalf.

Many creditors follow a similar process when you can’t pay your bills, but the amount of time they allow before sending your bill to collections can vary. In some cases, creditors will send bills to collections even if you are making payments on them. The collection agency can attempt to collect the debt through letters, email, text messages and phone calls.

How does a debt end up in collections?

Every lender has its own guidelines on how many payments a borrower can miss before they’re in default. With some lenders, a debt defaults as soon as the borrower misses a payment. With others, you’ll be charged late fees on your initial missed payments before the lender takes additional action.

Typically, it takes three to six months before a creditor marks your account as default. Once the debt is in default, the lender may try to collect the money itself or sell the debt to a collection agency.

Does debt collection affect you legally?

If you don’t respond to a debt collector within a certain period of time, they can sue you in court. This period of time varies by state, so check your state regulations to find out how long an agency has to sue you. If the debt collector wins, they may receive the right to garnish your wages. Garnishing wages means they can contact your employer and ask that a portion of your paycheck be diverted to them.

They may also put a lien on any property you own, like your home. In this case, you would be unable to sell the home while the lien is in effect, and your creditor might also be able to foreclose on your home with a court judgment.

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. A late payment can stay on your credit report for up to seven years. Each of these events hurts your credit score because your payment history equals 35 percent of your total score.

Once a debt goes to collections it can be added to your credit report as a separate account.
When the debt is transferred to collections, your account is flagged with a collection status. While the exact point drop varies from person to person, most consumers will see a major decrease in their credit score, often several hundred points. However, the impact of these entries will decrease over time, especially if you adopt positive financial habits.

How to pay off debt in collections

If you have a debt in collections, follow these steps to pay it off.

1. Confirm that the debt is yours

Don’t make any payments to a collection agency until you confirm that the debt actually belongs to you. Check your records to ensure that the stated balance is correct and contact your original debtor to make sure that you’re working with the right collection agency.

Mistakes happen, so confirming that the debt is your responsibility is a necessary first step. Does it seem like the debt isn’t yours? Send a dispute letter to the debt collector within 30 days of them contacting you. Once a debt collector receives a dispute letter they must stop trying to collect from you until they can send a written confirmation of the debt, like the original bill.

2. 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 states, it’s possible to reactivate the debt if you contact the collection agency or make a partial payment.

Confirm your state’s rules before taking further action and check that the debt hasn’t been discharged through bankruptcy or any other means.

3. Know your debt collection rights

According to the Fair Debt Collection Practices Act (FDCPA), debt collectors are limited in how they can communicate with you. They’re prohibited from calling between 9 p.m. and 8 a.m., they can’t contact you at work if you’ve told them not to and they can’t tell anyone else, like a coworker, about your debt. They also can’t harass, threaten or verbally abuse you.

If a debt collector is violating these rules, remind them of the FDCPA. You can also report them to the Consumer Financial Protection Bureau online (CFPB) or by calling 855-411-2372.

4. Figure out how much you can afford to pay

Before deciding how to pay off your debt, you’ll want to take stock of your budget and finances to assess how much you will reasonably be able to pay. Look at your monthly cash flow and determine how much you would be able to put toward debt repayment or debt settlement, adjusting your budget as necessary to cut back on optional expenses like streaming subscriptions or cable packages.

5. Ask to have your account deleted

If you can afford to pay a large lump sum, you can ask that the collection agency delete the debt from your credit report. If the debt collector doesn’t agree to this, you can request that they mark it as “paid in full.”

Either of these changes will improve your credit score and make it easier for you to qualify for another loan. Not all collection agencies will agree to this exchange, but it’s always worth asking.

6. Set up a payment plan

If you can’t pay a large lump sum, you can ask the collection agency to create a payment plan that you can afford. You’ll need to negotiate how many payments will be required before the debt is considered settled.

Negotiating medical debt

If you have medical debt, you may be able to negotiate interest-free payments with the provider directly. First, contact the billing office and ask if there are any programs you qualify for that can eliminate or reduce the balance.

Next, ask about your repayment options. If you’re not getting anywhere, ask to speak to a manager.

7. Make your payment

Once you and the debt collector have reached a written agreement for paying off the debt, you’ll make your payment. The most secure way to make a payment to a debt collection agency is by sending a check through the mail with a return receipt. This will prove that the check was accepted by the collection agency. It costs $1.85 for an electronic receipt and $3.05 for a mailed receipt. These receipts will come in handy if the collection agency ever claims that you didn’t make a payment.

8. Document everything

Borrowers need to be diligent about documentation when it comes to debt collectors. As soon as you start talking to a collection agency, write down the agent’s name, the agent’s contact information and what you discussed.

If you agree to a settlement with specific conditions, have them send you a copy of that agreement in writing. Without a written contract, you may have trouble getting them to delete the account off of your credit report, even if they verbally agreed to it.

Be aware of debt collection scams

Debt collection scams are real, and scammers may use anxieties about debt in order to pressure you into paying. 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. Never give anyone access to your bank account. Instead, pay with certified checks and keep detailed records of your payments along with your original agreement.

If you think a debt collector has broken the law, report them to the CFPB. You can also sue them in federal court within one year of when they broke the law.

What to do after you make your last payment

When you finish your payment plan or complete the lump sum, ask the collection agency for a letter of completion from a company signatory. Then check your credit reports to make sure that 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 takes time and diligence. It can take a lot of effort to pay off your debt and improve your credit score. Yet, the work is worth it in the end when it means improving your financial health for the long run.

If you’re having trouble paying off a debt in collections on your own, you may consider taking out a debt consolidation loan if your credit allows or if you can find a qualified co-signer. This won’t eliminate your debt, but it may help you pay less in interest and simplify the process.

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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