When you have debt in collection, your credit score suffers and new financing opportunities become limited. You will also begin to receive countless calls and letters from collection agents, adding stress to your daily life.
Rather than letting your financial troubles continue to spiral out of control, create a plan of action to repay collections in the way that works best for you. Here’s how to do it.
What is debt collection?
Debt recovery is a process by which companies attempt to collect outstanding debts from borrowers. A debt is collected when it is unpaid for an extended period, usually at least several months. Once the loan is in default, the original creditor can sell it to a collection agency or hire an agency to collect the balance on their behalf.
Depending on the type of debt owed, the time to collect an overdue invoice typically ranges from 90 to 180 days. The collection agency may attempt to collect the debt through letters and phone calls.
How does a debt end up in collection?
Each lender has their own guidelines on how many payments a borrower can miss before they default. With some lenders, a debt defaults as soon as the borrower misses a payment. With others, you will be charged late fees on your missed upfront payments before the lender takes any further action.
The 60 day mark tends to be the norm when it comes to debt default. Once the debt is in default, the lender can try to collect the money himself or sell the debt to a collection agency.
Does debt collection legally affect you?
If you don’t respond to a debt collector, they can sue you. If they win, they may be given the right to garnish your wages. In this case, they would contact your employer and request that part of your salary be diverted from them.
They can also put a lien on any property you own, such as your home. In this case, you would be unable to sell the house while the lien is in effect, and your creditor may also be able to foreclose on your house by court order.
Is Debt Collection Affecting Your Credit?
Any payment to a creditor that is at least 30 days late may appear on your credit report as a negative entry, with subsequent entries added for each additional 30 days of non-payment. Each of these events affects your credit score because your payment history equals 35% of your total score.
When the claim is transferred to collection, your account is flagged with a collection status. Although the exact drop in point varies from person to person, most consumers will see a significant decrease in their credit score, often by several hundred points.
Debt collection accounts remain on your credit report for as long as seven years from the date of initial failure. However, the impact of these entries will diminish over time, especially if you adopt positive financial habits.
How to repay a debt in collection
Before paying off a debt collection, follow these steps to make sure you cover all the necessary basics.
1. Confirm that the debt is yours
Do not make any payments to a collection agency until you confirm that the debt is truly yours. Check your records to make sure the balance shown is correct and contact your original debtor to make sure you are working with the correct collection agency. Mistakes happen, so confirming that the debt is your responsibility is a necessary first step.
If the collection agency is trying to collect a debt for a parent or spouse, you may or may not be responsible, according to the laws of your state.
2. Check your state’s statute of limitations
Each state has its own limitation period, which sets a maximum period during which the debt can be actively collected. However, in some states it is 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 verify that the debt has not been discharged through bankruptcy or any other means.
3. Know your collection rights
According to Fair Debt Collection Practices Act, debt collectors are limited in how they can communicate with you. They are prohibited from calling between 9 p.m. and 8 a.m., they cannot contact you at work if you have told them not to, and they cannot tell anyone else about your debt, such as a coworker. for example. They also cannot harass, threaten or verbally assault you.
If a debt collector breaks these rules, remind them of the FDCPA. You can also report them to the Consumer Financial Protection Bureau online or by calling 855-411-2372.
4. Find out how much you can afford to pay
Before you decide how to pay off your debt, you’ll want to take stock of your budget and finances to assess how much you’ll be reasonably able to pay. Take a look at your monthly cash flow and determine how much you would be able to spend on debt repayment or settlement, adjusting your budget as necessary to cut back on optional services like streaming subscriptions or cable plans.
5. Request the deletion of your account
If you can afford to pay a large lump sum, you can ask the collection agency to remove the debt from your credit report. If the debt collector does not agree with 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 accept 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 will need to negotiate the required number of payments before the debt is considered installed.
Negotiating medical debt
If you have medical debts, you may be able to negotiate interest-free payments directly with the provider. First, contact the billing office and ask if there are any programs you qualify for that can eliminate or reduce the balance.
Next, find out about your repayment options. If you’re not going anywhere, ask to speak to a manager.
7. Make your payment
Once you and the debt collector have entered into a written agreement to repay the debt, you will make your payment. The safest way to make a payment to a collection agency is to send a check in the mail with acknowledgment of receipt. This will prove that the check was accepted by the collection agency. It costs $ 1.75 for an electronic receipt and $ 2.85 for a mail-in receipt. These receipts will come in handy if the collection agency ever claims that you have not made a payment.
8. Document everything
Borrowers should be diligent with documentation when dealing with debt collectors. As soon as you start talking to a collection agency, write down the agent’s name, contact details, and what you discussed.
If you agree to a settlement with specific terms, ask them to send you a copy of that agreement in writing. Without a written contract, you might have a hard time getting them to remove the account from your credit report, even if they verbally agreed to it.
Beware of debt collection scams
Debt collection scams are real, and crooks can use concerns about debt to force you to pay. Beware of so-called debt collectors withholding information, calling you late at night, threatening you with 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.
First, never give anyone access to your bank account. Instead, pay with certified checks. Also keep detailed records of your payments with your original agreement.
What to do after making your last payment
When you have completed your payment plan or completed the lump sum, ask the collection agency for a letter of completion from a company signer. Then check your credit reports to make sure the account has been updated accurately, but note that changes may not be reflected for 30 days. Even after everything is properly updated, keep your recordings in a safe place in case problems arise later.
The bottom line
Paying off collections is not a quick process, but it can be a permanent solution to getting rid of problematic debt. If you’re having trouble paying off a debt collection yourself, you may want to consider taking out a debt consolidation loan if your credit allows it or if you can find a qualified co-signer. It won’t eliminate your debt, but it can help you pay less interest and streamline the process.
Whichever payment option you choose, take extra steps to confirm your debt and get the proper documents to protect yourself now and in the future.