How to Pay Off Debt in Collections

At the height of the pandemic, the U.S. enacted measures designed to keep people afloat during challenging economic conditions. This helped bring down the number of people who had debt in collections, estimated by the Urban Institute to be 64 million Americans as of August 2021, down from 68 million in 2019. But these actions were meant to be temporary, and there's a likelihood the number will rise as these protective measures lapse.
Not being able to repay your debt on time is bad enough, but having your debts sold to a debt collection agency is a nightmare scenario for any borrower. But it doesn't have to be that way. Instead of panicking and stressing out over dreaded phone calls or emails, you should keep a level head and research your rights and what steps you can take to get out of the situation. This article will walk you through how best to navigate the situation and come out a winner.

What is debt collection?

If you take out debt and fail to repay the money, the creditor sells it to a debt collection agency after it remains delinquent for several months. Because most companies lack patience or manpower to chase down delinquent borrowers, they see selling debt to these agencies as better use of their resources. A debt collection agency will go after different types of debt — credit card debt, student loans, medical bills, personal loans, auto loans and even cell phone bills.
But what's in it for the collection agency? These niche companies buy debt for pennies on the dollar, betting that they'll be able to convince (strong arm?) you into repaying delinquent debts. The more these companies can recover, the more they earn, making it a potentially lucrative venture. And whatever they collect, it's theirs to keep because they took the risk of purchasing a debt deemed uncollectable by the original creditor.
If a debt collection agency fails to make contact with you, it may even hire private investigators, and they may search assets to determine a debtor's ability to repay. To get paid, debt collectors can try to force the sale of an asset, or place levies on bank accounts or vehicles.

How debt in collections affects your credit score

Debt in collection adversely affects your credit score, depending upon the days your payment is overdue. The agency categorizes debt collections into 30 days, 60 days, 90, and 120 days. The longer the overdue period, the more devastating it will be for your credit score — that's personal finance basics. Remember: your payment history makes up 35% of your credit score.
Generally, debt collection remains on your credit report for seven years along with an additional 180 days from when the collection account first became overdue. If the account does not fall off from your score, you can file a dispute with credit bureaus and have it legally removed.

Prep work to do

You've hit hard times, your financial situation isn't good, and you have been struggling to pay debts. All this indicates that a debt collector will contact you any time. Here are a few things you can do before the agency communicates with you.

Do a deep dive into your debt

As soon as you're contacted, and before you begin to panic about making monthly payments, be 100% sure about your debt. Go through your record and contact your original creditor to corroborate that the old debt actually belongs to you. Be wary of scams — not every email, phone call, or message you receive from an agency is legitimate. This industry is full of bad actors. Scams can be reported to the state's attorney general, the Federal Trade Commission, and the Consumer Financial Protection Bureau. The National Foundation for Credit Counseling is also a helpful resource for dealing with debt collectors.
If you find the debt isn’t yours, you can send a dispute letter to the debt collector agency within 30 days to stop trying to collect the debt (if it is by mistake) or send a written confirmation of the debt.

Look into your state's statute of limitations

Every state in the U.S. has its own statute of limitations, which outlines a period of limitation to bring certain actions, including collecting debt. Most states have in place a statute of limitations of between three and six years. In some states, it is also possible to reactivate the debt upon contact with the collection company or by making a payment, meaning your debt isn't time-barred anymore.

Know your rights

The Fair Debt Collection Practices Act was enacted to protect consumers from abusive debt collection practices. The law states that debt collectors cannot contact you at work (if you have told them so) or between 9 pm and 8 am. They're also limited in how they can contact you. In addition, they cannot disclose your information or harass or threaten you in any form. They're also prohibited to tell anyone else about your debt.

How to pay off debt in collections

Create a plan

If you are unable to clear your debt in a lump sum payment because of its size, you should consider a customized repayment plan with the debt collection agency. For this to work, you will need to negotiate the terms and conditions of the repayment. Most debt collectors only charge the principal debt balance and not extra interest from borrowers. While this means you would have to do away with a discount that often accompanies lump sump payments, a customized plan will break down your payments into smaller, payable chunks without the pressure to pay off the whole amount in one go.

Ask about settlement

Because the debt collection agency bought your debt from the creditor, and thus took on immense risk, they would likely be willing to negotiate a deal with borrowers to earn some money and make a profit. Paying off your debt in one payment is a win-win situation for both the parties, but the borrower can work out other arrangements with the agency that may get you off the hook after making a partial payment. While having this discussion with the agency, you should keep a few things in mind:
  • Only agree to the amount you can actually pay. If you settle for an amount you're unable to pay, you will remain in a loop and it'll worsen your relationship with the agency from the get-go.
  • Try to negotiate with the collector to mark your debt as "satisfied in full" instead of "settled" in your credit report.
  • Make sure every point discussed and settled is properly documented and signed by both parties to avoid an issue in the future.

Try to pay it off in full

This is really a win-win for both parties. It allows the borrower to pay off the agreed-upon money and start fresh. From the agency's perspective, their bet paid off, and made money. Paying the amount in full in a lump sum reflects positively on your credit score.

Track all payments

After negotiating a deal and working out a payment plan, you should carefully document all communications and payments toward debt. The advisable payment option is by mailing a check with a return receipt. It costs $1.85 for an electronic receipt and $3.05 for a mailed receipt. This achieves two things: First, it proves that the debt collection agency accepted your payment. Second, you have a record of payment in case the agency claims not to have received payments from you.

Keep an eye on your credit report

Be sure to periodically check your credit report and corroborate whether the collection agency is keeping your credit report updated as per your customized plan or the negotiated settlement. It might take up to a few months to update. However, if you see that your credit report is not being updated, you should contact your agency.

Can a debt collection agency sue?

Short answer: yes. By taking a legal action, the agency can ask the borrower to appear before the court on the given date. If the borrower fails to appear, the court will likely rule in favor of the debt collection agency. This means the borrower could have their wages garnished, or even have their property placed under lien. Therefore, the borrower must communicate with the agency regarding the repayment procedure after validating their debt to avoid a legal battle.

The bottom line

Paying your debt in collections is not an ideal situation for borrowers. But, it is also not the end of the world either. Consumer debt collection agencies will chase down any form of unpaid debt such as medical debt, personal loans or auto loans. But for all their thunder, these companies too have to follow the law, which stops them from harassing any borrowers. Wage garnishment is a big lever these companies can pull (after court approval) in a bid to get you to comply.
But with careful planning, you can steer your debt repayment journey and remove a black mark from your credit report. With proper prior preparation, you can adopt different strategies to clear off any debts. Carving out a payment plan, choosing a settlement, paying full or in a lump sum, tracking payments, and reviewing your credit report can efficiently help you get rid of any long-overdue debts and start anew.
And if you're having a tough time repaying debt, you should look into debt management strategies like debt consolidation and debt refinancing, which lowers the interest rates charged by lenders.

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