How to Deal With Debt Collectors

man and woman couple sitting looking over financial information

Debt collection agencies can be tough to deal with, but if you approach them the right way—with knowledge and intention—odds are you'll achieve a positive outcome.

And it's important to work toward a good outcome. When these bad debts show up on your credit report, they're factored into your credit scores, often causing them to sink for years. So if your instinct is to dive under a table and wait for it all to blow over, don't. Instead, stand tall and make it a productive encounter. Here is how to handle a debt in collections like a pro.

Check Your Credit Report

If a creditor has recently charged off one of your debts, it's entirely possible that the collection agency hasn't reported it to the credit reporting agencies yet. Check your credit reports now. If it's not there, you may be able to satisfy the debt before it ever shows up on your reports.

Contact the collector and arrange for swift payment. This will really be advantageous if the debt was for something not normally recorded on credit reports, such as doctor or hospital bills. If it was for a credit card or loan, however, the late payments that preceded it going into collections will be listed on your reports until they age away, which takes seven years.

Know the Statute of Limitations

Worried about being sued for an old debt? Time may be on your side. Collectors have a fixed number of years to take legal action against you. The statute of limitations varies by state and type of debt, so find out what that period is for you by checking with your state attorney general's office. If the clock has run out, you're protected against a lawsuit. Mind that the statute of limitations has nothing to do with how long the debt can appear on your credit report. A collector may be prohibited from suing you after a few years, but the account can still show up on your report until it hits that seven-year mark.

Make Sure the Debt Is Valid

Within five days of contacting you about a debt, the collector should have sent you a written validation notice spelling out how much money you owe, the name of the creditor, and how to proceed if you think the debt is wrong. If you've already paid or believe the debt is in error, ask the collector to provide evidence that you owe the money by sending a "debt validation letter." Specify that you want proof that the debt is valid and within the statute of limitations for your state. If you send it within 30 days of receiving the validation notice, the collector must send you written verification before restarting collection action. Without that, it shouldn't be on your credit report any longer, so if it is, dispute it with the credit reporting agency.

Communicate Effectively

The phone won't stop ringing, and the collector is leaving firm messages. Now what? Decide how you want to handle the bill, then pick up the phone and speak carefully, says Leslie Tayne, financial attorney and debt expert in Melville, New York. "Stay in control," says Tayne. "If your goal is to resolve the debt, know what you're going to do about it before you start talking."

If you have the money ready to go, explain when you'll pay, then follow through. It will be to your scoring benefit, since satisfied collection accounts aren't included in the latest versions of the ® Score and VantageScore®. Only promise what you can deliver, though. "If you tell the collector you'll pay, you may be agreeing to a verbal contract without realizing it," says Tayne. "That will start the statute of limitations all over again."

Avoid being pressured into sending what you can't afford, especially if the debt is nearing the end of the statute. "If it's that old, you may want to let it die on the vine," says Tayne.

Consider Negotiating Your Debt

If you would like to pay the debt but don't have all the money to cover the entire obligation, you may try for a debt settlement. This is when you negotiate with the debt collector for a reduced sum. You can start the process by talking with the debt collector over the phone, but you must follow up with a letter. "Make sure everything goes in writing before sending the money," says Tayne. "If the collector asks for the payment first and you have no written agreement from them where they agree to the settlement, the collector may go after the remainder."

Will Settling Your Past Due Accounts Help Your Credit?

While settling your account instead of paying the full amount you owe is not looked upon favorably by creditors, it's better than not paying at all. The credit scoring model used will determine how the settlement is considered and how it impacts your credit.

Understand Your Rights

A powerful federal law to become familiar with when communicating with debt collectors is the Fair Debt Collection Practices Act (FDCPA). It regulates the way collectors can behave when contacting you, so it's a good idea to remind them that you know what can be said and done. Abusive, unfair and deceptive practices are illegal. Among the many restrictions, debt collectors can't:

  • Threaten you with harm, use obscene language or lie (for example, tell you they will sue you when they don't have any intention to do so)
  • Call repeatedly
  • Try to add on fees or interest to the debt unless it's stipulated in the original contract or permitted by state law
  • Deposit a postdated check early
  • Take or threaten to take your property (unless it can be done legally)

If a debt collector is not following the rules, submit a complaint with the Consumer Financial Protection Bureau or your state's attorney general.

Send a Cease and Desist Letter

There may be a time when you just want to stop hearing from the debt collector altogether. If so, a cease and desist letter may be in order. As per the FDCPA, it's your right to send one. There are two basic circumstances where you might want to do this:

  • The statute of limitations has run. The collector can still contact you, but since you're safe from a lawsuit, you can stop the calls and letters once and for all with the cease and desist letter.
  • You have no current or future assets to pay even if you are sued and you lose the case. You'd be considered "judgment proof," which means a lawsuit would be fruitless because the collector wouldn't get anything if they won.

If a cease and desist letter makes sense for you, write it, make a copy and send the letter by certified mail, return receipt requested. Upon receipt, the collector can either notify you that they received the letter and will cease communications or inform you that they will file a lawsuit (which is why you have to be sure that the debt has either passed the statute of limitations or that losing a lawsuit will have no impact on you).

Something to keep in mind when dealing with collection agencies is that they don't want you—they're after the money. It's not personal. If you pay them, either in full or as a settlement, they'll leave you alone. And if you can't or won't, but manage the situation the right way, you'll still come out ahead.

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