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If you've hit hard financial times and are struggling to pay your bills, it's possible one or more of your accounts may wind up in the hands of a debt collector. As of 2019, according to The Urban Institute, 68 million American adults had debt in collections. In the third quarter of 2020, overdue consumer debt in the U.S. totaled $485 billion, according to Federal Reserve data.
Fortunately, if you're dealing with a debt collector, you're not helpless. Once your debt reaches collections, it's important that you don't ignore it. You're still legally responsible for the debt, after all. You can work to pay it off, either with one lump-sum payment or by trying to negotiate a payment plan.
But what if you can't reach an agreement with the debt collector? You may seek help from a nonprofit credit counseling service or, if legal action is necessary, from an attorney.
Regardless of how you decide to attack debt that's in collections, keep in mind it's possible to straighten out your finances. Eventually, you'll see the collection account fall off your credit report and your credit scores recover. Here's what you need to know to start the process of recovery.
What to Do When You Find Out Debt Is in Collections
After learning your debt is in collections, take a deep breath before you do anything else. There's no need to panic or make rash decisions—plenty of remedies are at your disposal. It's time to take matters into your own hands.
Don't Ignore the Debt
You may be inclined to ignore the seemingly nonstop calls and letters from debt collectors. However, ignoring the debt won't erase it—in fact it can make matters worse. Therefore, your best bet is to acknowledge and tackle the debt. Doing so can ease your mind and help reduce damage to your credit.
Contact the Creditor
If your debt has been overdue for only a few months, debt collection will likely be handled by the creditor—your credit card issuer or the bank you got your car loan from, for instance. You'll want to deal with the creditor before your debt winds up being transferred to another company. If the creditor is unable to collect money from you, it might sell your debt to a debt collection agency or another company. Once the creditor transfers the debt, it might be repeatedly sold and transferred from one debt collection company to another.
Put a Stop to the Calls and Letters
Consider asking the debt collector to stop contacting you. This could prevent the anxiety that comes with answering phone calls from debt collectors or opening the mailbox to find a threatening letter. In most situations, a debt collector must quit reaching out to you if you make that request in writing, except to acknowledge that it will give up contacting you or to inform you that you're being taken to court.
But putting a stop to collection-related calls and letters won't make your debt disappear. Your debt in collections can still be reported to the credit bureaus, and the debt collector still can file a lawsuit against you to recoup its money.
Try to Work Out a Deal
When debt is in collections, the creditor's or debt collector's primary goal is to get all or some of the money that it's owed. Therefore, you might attempt to negotiate a way to wipe out the debt, such as by making a lump-sum payment or by committing to a long-term payment plan.
Be sure to figure out how much you can afford to pay, either all at once or over time, before you make a settlement offer. Then, approach the debt collector with your idea. For instance, you might propose paying two-thirds of the $4,000 you still owe on a credit card or paying off your remaining $2,000 balance on a personal loan over the course of 24 months.
Before you hand over a single penny, make sure you're clear about who to pay. If the original creditor still owns the debt, you'll send your money to them. If the original creditor turned over your debt to an outside company, you'll pay that company.
Consider Hiring a Lawyer
If the debt collector has threatened to sue you, it might make sense for a lawyer to handle your case if it goes to court. After you hire an attorney to represent you, you won't be contacted by the debt collector. Instead, all communication will be between your lawyer and the debt collector.
Ask a Credit Counseling Service for Help
So, let's say the debt collector has not sued you. In this instance, you may want to seek assistance from a nonprofit credit counseling service. The service can assign a certified credit counselor to you who will come up with a repayment plan, along with a household budget to put you on a better financial track.
How to Deal With Debt Collectors
It can be annoying and scary to be pestered by debt collectors, but there are steps you can take to gain some control over the process. A federal law known as the Fair Debt Collections Practices Act governs how debt collectors interact with you.
Aside from your ability to request that a debt collector stop calling or emailing you, here are some of your other rights:
- Under the Fair Debt Collections Practices Act, a debt collector can't be abusive, deceptive or unfair when it's trying to collect money from you. For example, a representative of a debt collection agency isn't allowed to hurl four-letter words at you over the phone or to threaten jail time if you fail to pay up.
- The law prohibits a debt collector from calling you before 8 a.m. or after 9 p.m. You can give your permission for a debt collector to contact you outside those hours, though.
- Debt collectors are disallowed from reaching out to you at your workplace if your employer doesn't permit you to take phone calls.
- If you believe a debt collector is breaking the law, file a complaint with the federal Consumer Financial Protection Bureau or contact your state's consumer protection office.
Ways to Pay Off Debt in Collections
As we've gone over, the best ways to pay off debt that's gone to collections are to negotiate a lump-sum payment or set up a payment plan. Starting the process of paying off the debt is a big step toward saying goodbye to debt collectors and, eventually, to the debt.
When you're weighing a lump-sum payment or payment plan, go over all of your debts. Make a list of what you owe on all your loans and credit cards, and note the interest rates and monthly payments for each debt. Then, add up how much you owe on all of these debts each month. Checking your credit report allows you to see your debt balances in one place.
Once you've completed that list of debts, calculate all of your other expenses. This includes rent, groceries, utilities and gas. Some of these expenses vary from month to month, so you'll want to come up with a monthly average for non-debt expenses based on that spending over the past several months.
Next, subtract your after-tax income from the combination of your monthly debt and non-debt expenses. If your income total is higher than your expense total, you can put the difference toward clearing the debt that's in collections. If the leftover amount falls short of what you owe, look for ways to cut spending, earn extra income or both.
Prioritizing the debt that's in collections can help avoid further harm to your credit and can get rid of your debt collection headache.
Do You Need to Notify Credit Bureaus of Paid Collections?
Once you've paid off or settled debt that's been in collections, you don't need to notify the three national credit bureaus—Experian, TransUnion and Equifax. That's because the debt collector is supposed to report the wiped-out debt to the bureaus, which will list it as either "paid" or "settled."
What if the debt collector doesn't tell the credit bureaus that your debt has been paid or settled? File a dispute with the bureaus so that your credit report can be updated.
How Does Paying Off Debt in Collections Impact Credit?
Collection accounts can drag down your credit scores, but paying off or settling a debt that's in collections may not necessarily improve your credit scores. Newer credit scoring models ignore collection accounts with a zero balance, but older credit scoring models take those accounts into consideration. This means paid-off or settled collection debt may bump up your credit scores under newer scoring models, yet paid-off or settled debt may not make your credit scores budge under older scoring models.
Since it's not likely you'll know which credit scoring model or models your future lenders will use, it's impossible to say for certain whether paying off a collection account will help you secure better terms on credit.
A collection account remains on your credit report for seven years from the date the debt originally became overdue. After the seven-year window closes, the collection account is automatically removed from your credit report. Unfortunately, you can't get a paid-off or settled collection account removed from your credit report before the seven-year period ends.
The Bottom Line
If one of your debts ends up in the hands of debt collectors, don't neglect it. Ignoring calls and letters regarding past-due debt merely prolongs the issue. The debt won't simply vanish over time. You can, however, take a head-on approach to erasing the debt by, first and foremost, being honest about the situation and taking action. This action may include making a lump sum payment or arranging a payment plan to take care of the debt. By resolving the issue, you're taking care of yourself—and taking care of your financial future.