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Debt Guide: What To Do When Your Debt is With a Collection Agency

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Below is an excerpt from our Debt Free Forever Guide. Be sure to download the free guide to help dump debt for good.

Struggling to make payments on debt, but not delinquent yet? Then start here.
Delinquent on debt, but it’s still with the bank? Then start here.

It is important to understand how collection agencies work, and then you can understand how to negotiate with them.

Debt collection agencies, for the most past, are tiny compared to the big banks you were dealing with previously. Some of them are incredibly tiny, and you have to be careful. Although this is not the case with all of them, many debt collection agencies are extremely liberal with the law and will try to scare you and manipulate you into paying.

What to Know About Collection Agencies

  1. Debt collection agencies buy debt for pennies on the dollar. Imagine you have $100 of debt with Citibank. They try for 6 months to collect the debt. At month 6, they write off the debt (take a loss) and then sell the debt to a collection agency. The agency will likely only pay $1 to $2 for the debt. So, you may have originally owed Citibank $100, but the debt collection agency only paid $1 or $2 to get that contract. Although they have the legal right to collect the full $100, they are happy even if they collect much less. If they pay $1 for the debt, and then collect $2, they have doubled their money.
  2. Be careful giving your account information to a debt collection agency. They are famous for trying as often as possible to get money out of any account where they have account information. Even if you don’t authorize them, it can get very difficult to prove. It becomes your word versus their word. So there are specific ways that you should make a payment to a debt collection agency, which we describe in more detail below. So, now you know that the debt collection agency only paid pennies on the dollar. With that information, you can negotiate hard for a settlement.

What to Know When Negotiating

  • After 7 years (from going to the collection agency), the debt will no longer impact your credit score. They will still have the legal right to collect, but the statute of limitations will limit their ability to sue or garnish wages. So, if you are close to 7 years, you may not want to pay. You may just want to wait.
  • Negotiate hard on the phone. They will try to threaten you (and they are good at it). Tell them that you know your rights, and that you are not afraid to go to the CFPB if they don’t respect your rights and protections. You should be able to settle for at least 50% of the face value. You may even get a better deal. (For example, if you owed $5,000 than you can offer $2,500).

What To Do When You Reach an Agreement

  • You do not make any payment until you get confirmation of the settlement terms in writing
  • The debt collection agency writes that, upon payment of the settlement, the debt will be considered closed. They need to make it clear that this is a full and final settlement, and no further collection activity will take place. Warning: the forgiven debt may be subject to income tax. For example, in this case, the $2,500 that is forgiven will be taxable.
  • You should ask the debt collection agency to delete the collection item from the credit bureau. They may or may not do this – but it is certainly worth asking.
  • Once you agree the settlement amount, open a separate account to make the payment.

Remember: you never want to give the collection agency access to your core checking account. We recommend going to WalMart and opening a Bluebird. It is free, and comes with checks and online billpay. Only put into the account the amount that you agreed for the settlement, and then make the payment. You can close the account once the account is settled and complete.

Make sure you keep a paper trail of your settlement. If something goes wrong in the future, it is your PAPER against theirs.

If the collection agency tries to play dirty, or if another collection agency calls and tries to get money out of you, make sure you DO NOT AFFIRM THE DEBT. Tell them that you do not recognize the debt. You can then complain to the CFPB.

Disputing Collection Items That Aren’t Yours

If you see a collection item on your credit report that does not belong to you, it is easy to have it removed. You just need to protest online, at each of the 3 credit reporting agencies. You can dispute those records here:

Download our Debt Free Forever Guide! It’s FREE and will help get you back on track.


Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com


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Consumer Watchdog: 7 Things You Need to Know If You Have Debt in Collections

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Dealing with a debt collection agency can be painful. The phone never stops ringing, and they won’t stop asking for money. Agencies have a reputation for pushing the boundaries of the law, using aggressive (and sometimes illegal) tactics, and bending the law to pressure people into making payments.

In fact, at the Consumer Finance Protection Bureau (a government agency that gathers financial services complaints), collection agencies are the fastest growing complaint category. And the main reason people complain: they don’t recognize the debt that is being collected. That complaint is often valid. There is no central registrar of debt, and sometimes the only “proof” that a collection agency has of your debt is that your name is on a spreadsheet. The debt collection market has a high risk of fraud, abuse and simple human error.

In this post, we wanted to make it clear:

  • How a debt can end up with a collection agency
  • The impact of a debt collection item on your credit score
  • Seven things you need to know about a collection agency, and your rights

Why are they calling me?

A collection agency will take control of your account when: they buy the debt, or they are hired by the bank/entity who owns the debt to collect on their behalf.

Banks and credit card companies usually make the collection calls themselves during the first 180 days. However, after 180 days of collection activity, the bank “writes off” the debt. At this point, most major banks will hire a collection agency to collect the debt. And after a few more months, the banks will typically sell the debt to a collection agency. When banks sells the debt, they wipes their hands of the relationship.

The business model of an agency is to collect more from you than they pay for the debt. So, if they pay one cent for every $100 of debt, they will want to collect two cents. That is why they are begging, prodding and pushing for any payment, however small.

Another common type of debt to end up with a collection agency is medical debt. Your doctor or hospital decides when they hand the debt over to the collection agency, but it is usually around 60 days without payment. There are a lot of horror stories here, given the complexities of our medical system. Over 60 million people have medical collection items.

But any debt can ultimately end up with a collection agency. If you owe money to your phone company, utility company, or anyone else – that debt can end up with an agency.

And, when debt is with a collection agency, a “collection account” will appear on your bureau. This will have an impact on your score.

Impact on your credit bureau

A collection item has a big impact on your credit bureau. The higher your score, the more points your score can drop. For example, if you have a 770 credit score, you could see your score drop 40 to 70 points from a single collection item.

A collection items stays on your credit report for seven years. Even if you pay the collection item, it doesn’t disappear.

Fortunately, this is changing with FICO 9. If you pay off a collection item, the item will no longer be included in your FICO score. However, it will be awhile before banks start using FICO 9.

In the current model, the only way for a collection item to disappear is to wait seven years from the date it is first reported. So, that means seven years from the date that you become 180 days past due.

The only way to have a collection item removed is for the collection agency to remove the debt. You can ask an agency for a “pay for delete” deal. This means that you agree an amount to pay, and then the agency will remove the collection item from your account. Some collection agencies will offer this (even though they technically are not supposed to do so). The closer you are to seven years, the more likely they are to deal with the debt. You can also dispute the item with the credit bureaus (online). If the debt collection agency does not respond with proof of the debt in 30 days, then the item would be removed. Here are the links to dispute:

7 Things to Know

  1. If you don’t think the debt is yours, then take action right away. Within 30 days of the first collection activity, write a letter (certified, copied, with proof of delivery) to the collection agency. Tell them that you do not owe the debt and they must cease and desist all collection activity. Collection activity must stop until the agency provides concrete proof that you owe the debt.
  2. If you don’t think the debt is yours, and the collection agency provides proof that you don’t agree with, then complain to the CFPB. The more documentation you have, the better.
  3. Dispute the items with the credit bureaus. You can dispute the items online at Transunion, Equifax and Experian. It is fast and easy to make a dispute. The burden of proof is now with the collection agency, and they often will just decline to provide further information. If they don’t provide proof within 30 days, the information disappears from your bureau.
  4. The item disappears from your credit report seven years after it is with a collection agency. That usually means seven years after you become 180 days past due. This is not the same as the date you opened your account. Sometimes the best option is to just wait for the item to disappear.
  5. Be careful when you communicate with the agencies. There is a statute of limitations, which varies by state. After the statute of limitation expires, you are protected from further legal action (wage garnishment, etc.). In some states, admitting that the debt is yours on the phone is enough to reset the statute.
  6. Just because you are outside of the statute of limitations doesn’t mean that the collection agency won’t try to sue you. And, if they do, make sure you defend yourself in court. It will be easy: you just reaffirm the statute of limitations. But, if you don’t defend yourself, you could end up with wage garnishment or a new judgment. In addition, complain to the FTC, because it is against the law for a collector to sue you or threaten to sue you on a time-barred debt.
  7. When all else fails, use this line with the collection agency: “I do not recognize this debt. I have provided a written request for you to cease and desist all collection activity. In addition, I have complained to the CFPB. After this conversation is complete, I will reach out to the CFPB to update my complaint with this conversation. Given that you have not provided adequate proof that I owe this debt obligation, I believe you have further incriminated yourself by making this phone call. I will also provide a written complaint to the FTC, as I believe you are violating the FDCPA. At this point, I am going to terminate the conversation, and I hope that you will respect the law and promptly cease and desist from all collection activities, and ensure that negative information is removed from all 3 credit bureau. Goodbye.”

If you have questions or feel you are being unjustly harassed by a collections agency, then reach out via TwitterFacebook, email info@magnifymoney.com or in the comment section below!

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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