What to Expect When You Have Debt in Collections

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Updated on Wednesday, November 18, 2020

When a debt goes unpaid, creditors often pass it off to a collection agency that will contact you in various ways in order to get you to pay up. Meanwhile, your credit score will take a significant hit when you default, limiting your access to new credit. Here is a closer look at what you can expect when a bill lands in collection, as well as how to dispute collections for money you don’t owe and how to work with an agency to eliminate the debt.

What is a debt collection agency?

A debt collection agency is a company that collects past-due funds from borrowers on behalf of creditors. Some creditors use an internal collections department or subsidiary, while others will send your account along to an outside agency if your bill is in default, or considerably overdue.

Once a bill is sent to collections, the collection agency will contact you for payment and you’ll no longer hear from your creditor or be able to pay them directly. The agency will then work to recover unpaid funds in exchange for a portion of your payment.

It’s likely your bill won’t suddenly end up in collections. Instead, you’ll hear from your creditor multiple times and over three or four months before your account is finally turned over to collections. However, it’s also possible for a debt to be sent to collections without notice because creditors are not required to inform you. This is sometimes a complaint with medical bills.

What to do if a debt collector contacts you …

  • Don’t share personal information until you’re sure you owe money.
  • Ask for identifying information, like the collector’s name and address, as well as the amount of the debt. Verify both are legitimate to avoid a debt collection scam.
  • Determine how old the debt is, such as by asking when the last payment was made. If the debt is beyond the statute of limitations, it is considered time-barred, which means you can’t be sued for it.
  • If you don’t believe you owe the debt, dispute it in writing within 30 days.
  • If the debt is yours, negotiate a payment plan or lump-sum payment for all or a portion of the debt. Get the agreement in writing.

What it means when your debt is in collections

Your debt goes to collections after your creditor has repeatedly failed to get you to make payments. The agency will then step up efforts to contact you, and you’ll start receiving calls and letters, sometimes persistently.

Here’s a timeline of what to expect when you’re late paying bills:

What happens when you’re late on payments
Days your payment is overdueWhat happens
0-30Your creditor will likely contact you to let you know your payment is past due. You may also be charged a late payment fee.
31-60Your creditor will report your missed payment to the major credit bureaus, possibly causing your credit score to drop 90 to 110 points.
61-90After two missed payments, you’ll likely be charged a penalty APR on credit card debt.
91-120Your creditor may enlist the help of a debt collection agency and also report a default on your account. This can drop your score another 50 points.
120+By now, your debt will likely be in collections. The debt collection agency may threaten to garnish your wages or take you to court, depending on the laws in your state.

Letting a debt go into collections can have a devastating effect on your credit score. However, the drop will also depend on how much other negative information is in your credit history. If you have excellent credit, you might see your score drop to as much as 150 points. If your score is already low, you’ll likely see less of a drop.

Like most negative credit information, collection accounts can stay on your credit report for up to seven years. However, paying off a debt in collections won’t necessarily improve your score. That’s because some lenders — like mortgage lenders — still use older scoring models when assessing your eligibility for credit. Unlike newer scoring methods, older methods keep a record of negative collection information even if the debt has already been paid off.

Your rights during the collections process

You have certain rights when it comes to how debt collectors can behave. For example, by federal law, collectors are required to send you a debt validation letter within five days of contacting you. The letter needs to detail the amount owed, the name of the creditor and how to dispute the debt. If you receive a letter like this — and don’t think the debt is legitimate — you have 30 days to challenge it in writing.

As you’ll see below, federal law also gives you the right to request in writing that a debt collector stop contacting you. A collector is exempt from this requirement only if they need to inform you of an impending lawsuit or if they’re stopping efforts to collect your debt.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is designed to protect consumers from unfair and deceptive practices by debt collectors. It covers most debts, other than business debts, and sets forth rules for how and when a debt collector can contact you.

Under the FDCPA, debt collectors cannot …

  • Contact you between the hours of 9 p.m. and 8 a.m.
  • Contact you at a location you’ve indicated is inconvenient, like your workplace
  • Harass you with threats of violence, obscene language or excessive contact
  • Falsely threaten arrest, legal action or repossession of an asset like a car or home
  • Claim to be an attorney or government representative
  • Lie about your debt or how much you owe
  • Add interest charges or fees not allowed in your state or specified in the contract with your creditor
  • Garnish wages without a court order
  • Sue you for time-barred debt that has passed the statute of limitations in your state
  • Inform others about your debt unless it’s your spouse, guardian or attorney

If a debt collector violates any of these rules or any laws that apply to debt collection in your state, report their behavior to the following …

Under the FDCPA, you also have the right to sue a debt collector in court as long as it’s within a year after the violation. If you win, you might be compensated for any distress you experienced, as well as any wages you might have lost. Keep in mind, however, that suing a debt collector for illegal behavior doesn’t necessarily erase any debt you might have owed.

How to dispute debt in collections

If you have been contacted about a debt that you do not believe is yours, follow these three steps:

  1. Send a written dispute letter. Do this within 30 days after a collector first contacted you. In your letter, ask the agency to stop contacting you unless it can provide proof that the debt is legitimate. You can use this sample dispute letter from the CFPB.
  2. Keep a copy for your records. Always keep a copy of your dispute letter in case you need to go to court.
  3. Wait for verification. By law, your debt collector needs to stop contacting you until it verifies the debt in writing. At the very least, the verification you receive should list the amount and date of the debt you owe, along with the creditor’s contact information.

How to pay a collection agency

Pay in full

The most straightforward way to handle a debt in collections is to simply pay what you owe. You won’t need to negotiate, and it might improve your credit faster than some of the options described below.

Coming up with a lump sum might prove difficult, however. If that’s the case, you may need to:

  • Ask a friend or family member for financial help: To keep your relationship intact, draw up a repayment plan.
  • Tap your savings or retirement account: Consider these options only if you think you can rebuild the account once the debt is paid off. If you’re behind on debt that is not in collections, you may want to prioritize it in order to avoid further damage to your credit.
  • Use a debt consolidation loan: This type of personal loan lets you pay multiple bills with a single monthly payment at a fixed rate and over a fixed term. If you have weak credit and cannot qualify for a traditional debt consolidation loan, consider a secured loan, which is backed by an asset you own, like your car.
  • Consult a nonprofit credit counseling agency: An agency can help set up a debt management plan, which might let you pay off your debt over time. If interest or fees have piled up on your debt, a counselor may also be able to negotiate a lower rate or help waive fees.

Once you’ve paid off your debt to a collection agency, you can expect the agency to stop calling you. You can also expect an amendment to your credit report to show the collection account was paid in full. Check your credit report to make sure your information was updated.

Negotiate a payment plan

It’s likely your debt collector may offer you a payment plan that lets you pay off your balance with fixed payments over a fixed period of time. If this option might work for you, get an agreement in writing, and make sure your account will be reported as “paid in full” once your last payment is in.

if your debt is old, be cautious with a payment plan. Time-barred debt means you are no longer legally obligated to pay it because it is past the statute of limitations in your state. However, making even a single payment might reset the clock and allow a debt collector to take you to court for the full amount you owe.

Settle the debt for less

If you’re short on cash and don’t qualify for a loan, a debt settlement will let you repay the owed debt for less than the total amount. Debt settlement can be harmful to your credit, however, so ask the debt collector to have any negative information related to the debt removed from your credit files as part of a debt settlement agreement.

What happens if you ignore the debt?

If you ignore a debt in collections, a debt collection agency will continue to contact you, and your failure to respond may cause their actions to escalate. With time, a collection agency might threaten to have your wages garnished or take you to court. With a court order, a collection agency might also be able to take money directly from your paycheck or bank account.

That’s not the case with time-barred debts. For this reason, if your debt is old enough and cash is tight, it might make sense to wait until you are no longer legally liable for it. The caveat: If your debt were to get sold again — possibly to another collection agency — a new collection account might appear on your credit report.