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If you have unpaid debt that’s been handed over to a collection agency, you may not be sure what steps to take next, or what rights you have as a consumer.
Take a look below to see how to pay back collections responsibly, spot signs of potential scams and how to decide whether the debt needs to be repaid at all. You’ll also see tips for getting your credit history back on track.
If you’re contacted by a debt collection agency, the first thing to do is to make sure the claim is authentic. Debt collection fraud accounted for 16% of all consumer reports made to the Federal Trade Commission in 2018 — second only to imposter scams.
Signs of debt collection scam include:
There are several ways to check if a debt collection call is legitimate. Ask for the caller’s contact information, such as their name, the company name, address and phone number. You’ll also want to note the date and time of the call, as well as research the company and verify that the address is authentic. Finally, you’ll want to ask the collector for the name of the original creditor, so you can confirm with the creditor yourself.
You can also check your records and credit report to verify the debt amount and the current owner of the debt. Next, contact the original creditor of the debt. They may be able to confirm that they sent your debt to a collection agency — and if the collector that has contacted you has the right to pursue the debt.
The Fair Debt Collection Practices Act is a federal law that gives you certain rights against third-party debt collectors. It also limits the methods these agencies can use to contact you.
Under this law, a debt collection agency:
If you feel a collection agency has violated one of the rights above, report it to the FTC and to your state attorney general. You may also want to speak with a debt collection attorney to determine if the collector is breaking the law — and whether your claim might be strong enough to take to court.
In some cases, a debt collector might still reach out to you even if your debt should have cleared, perhaps because it was discharged in bankruptcy. Other times, the debt collector may mistake you for another individual.
Make sure the debt collector sent you a debt validation letter. The FDCPA requires collection agencies to send this document to prove the debt is yours, and it needs to be sent within five days of first contacting you. When you receive your letter, look for the following:
Confirm your debt before making any payments on it. Making partial payments implies you are taking responsibility for it, and this means you might be forced to pay the balance even if it’s not yours. If you want to dispute your debt or need more information, send a verification letter to the collection agency. The Consumer Financial Protection Bureau has sample letters that may help depending on your needs.
Tip: Some collectors may try to add additional fees or interest on top of what you actually owe. However, this is only permissible in certain states or if it was part of the agreement with your creditor. Verify the correct amount of the unpaid before repaying it.
Sometimes collection agencies will try to collect on debt that is several years old. However, the FDCPA sets a statute of limitations, which means collectors have only a limited amount of time to legally pursue the debt and try to get paid back.
Every state has a different statute of limitations — typically three to six years for credit card debt — so check to see what’s allowed where you live. Once the allotted number of years have passed, debt companies can still try to collect the debt but they can’t sue you for it anymore. When this happens, the unpaid bill becomes what’s called a time-barred debt.
With time-barred debt, it’s important to not make payments toward the debt or acknowledge that you owe the money. Otherwise, you will restart the timer on the statute of limitations, making you liable for the debt once again. If you’re unsure whether your debt has passed the statute of limitations, ask the collector for a debt validation letter that includes the date of your last payment.
There is no real way to get out of collections without paying up. While you have no legal obligation to repay time-barred debt, it’s still an unpaid debt that stays in your credit history and can lower your credit score for years. That, in turn, might affect your ability to receive a loan or mortgage, buy insurance or get access to a new line of credit like a credit card.
It’s illegal for debt collectors to sue for time-barred debt, so if this happens to you, inform the judge that the debt is time-barred and provide documents to confirm the date of your last payment.
Unforeseeable events like job loss or sickness can cause anyone’s finances to spiral out of control. Also, if you’re juggling other obligations, you may not be able to worry about how you will pay collections back on any outstanding debt.
Before paying off what you owe, weigh the pros and cons. For one, making payments on your debt will reset the timer on the statute of limitations. Also, by spending a substantial amount of your savings trying to pay down debt, you might shortchange the funds you have to cover emergency bills. Finally, paying debt collectors might not necessarily improve your credit score. That’s because collectors and credit reporting agencies aren’t required to remove collection references.
Still, paying off collections might ultimately improve your credit score, especially if your debt is still within the statute of limitations in your state. It will also stop collection agencies from regularly contacting you. Above all, it will finally resolve your debt — and improve your chances of getting favorable treatment from prospective lenders in the future.
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The simplest way to pay off collections is to pay the entire amount in one lump sum. However, if access to cash is a concern, consider borrowing money to pay off the debt instead. Taking this route won’t get rid of your debt, but it might be easier than having to deal with a collection agency for the rest of your repayment period.
A debt consolidation loan may be able to provide you the funds you need to completely pay off your debts, and in the form of a single monthly payment. However, having debt in collections might prevent you from qualifying for affordable loan rates and terms. If that’s the case, it might be worth taking out a loan with a cosigner, to qualify for more attractive terms.
If you have fair or bad credit, you may also want to consider a secured personal loan or a 401(k) loan. Both loan types come with pros and cons. For example, a secured personal loan requires you to put some type of collateral, like a car or other form of property.
A debt collection agency may be willing to work out a payment plan with you, so you can make regular payments — possibly without paying interest — until the debt is fully paid off. At that point, the collection agency contacts the credit bureaus to let them know you’re debt-free.
If you go with a collection agency payment plan, avoid drawing out your repayment schedule longer than necessary. Although this decision might be easier on you financially, it also means your debt will stay on your credit report longer.
Nonprofit credit counselors offer debt management plans that might help you pay off your entire debt amount in three to five years. You’ll deposit funds into an account you share with the agency, and they’ll use the money to directly pay your creditors.
Debt counselors may also be able to negotiate lower interest rates and monthly payments on your behalf, waive fees that typically come with your debt and help you draw up a budget. Most agencies charge a minimal fee. To find a certified counselor, consider any of the member agencies affiliated with the National Foundation for Credit Counseling.
Don’t confuse debt management plans with debt settlement plans. The latter are typically expensive, rife with scams, and bad for your credit because they require you to stop making payments while they work with creditors. There’s also no way to guarantee debt settlement will work, so you’ll probably be better off allocating those funds elsewhere.
Your debt collector may be willing to let you settle your debt for a lower amount, in exchange for a lump sum payment. Collection agencies often see this as a win-win: You save money and the company still gets a portion of what you owe.
You can negotiate a debt settlement on your own, or with a debt settlement company. Either way, make sure to get an agreement in writing before you start making payments.
You can pay a debt collector directly. Commonly accepted payment methods include:
In some cases, a collection agency might ask you to allow it to make automatic withdrawals from your bank account. However, this might create a problem if you were to run into financial difficulties or overdraw on the account. It’s usually better to pay a collector with a certified check or money order that secures your personal information and leaves proof of payment.
Once you finish paying off the debt your owe, your credit reports will automatically update to reflect the change. However, because creditor billing cycles vary, it may take about 30 days for your reports to actually show the change. If 30 days have passed, and your credit report still hasn’t been updated, contact the credit bureau and send a written notification to the debt collector as well.
Check with your collector to see how a paid-off account will be reported to credit bureaus. To minimize damage to your credit score, you’ll want it reported as “paid in full” so it will be clear the debt wasn’t settled for less than the full amount.
Even if you fully pay off your debt, it’s worth remembering that collection activity is allowed to stay on a credit report for seven years. To ensure your credit history recovers in the end, you’ll need to work at landing in collections again.