If you are normally on top of your finances, learning that you've let a debt be sent to collections can be a bit of a shock. On the other hand, if you are in the process of repairing your credit history and overall creditworthiness, you may already be aware of several accounts that have been sent to collections. Knowing how to handle a debt in collections the right way can pay dividends in keeping your credit looking as good as possible.
The best way to pay off a debt in collections is to first verify that the debt is yours and valid. Then you'll need to contact the collector for payment. You may be able to negotiate less than what you owe but get the offer in writing, as well as their commitment to remove the credit blemish.
Having a debt sent to collections may seem like a big deal, but you can often take care of it relatively easily, sometimes for even less than what you owe. There are a few more things to keep in mind when you're looking at getting rid of collections accounts on your credit report. We're going to explore exactly how you should go about cleaning up your credit and how exactly you can pay off the debt in collections, the right way.
Paying Off Collections
When you set out to clear your debts in collections, you'll need to follow the same basic process for each one individually. Some debts may be significantly easier than others to pay off, depending on the amount of the debt, the amount the collector is willing to ultimately settle for, and more. Here are the basic steps for paying off a debt in collections.
Make Sure The Debt Is Yours
There are hundreds of millions of people in the US, and each of them has a credit report, so mistakes are going to happen. If you have a debt in collection, ask the collector to provide verification of the debt. It should be provided to you within 30 days.
Make Sure The Debt Is Still Valid
Once you have the details of the debt, make sure that it is still a valid debt under your state's statute of limitations. If the statute has expired, you still owe the debt, but there are no further legal remedies that the original creditor can use to collect the debt from you. Also, be sure the debt wasn't already discharged during bankruptcy.
Understand Your Rights
The Fair Debt Collection Practices Act limits the actions and communications that debt collectors can take engage in with you. They are limited in the hours that they can call, and they are prohibited from contacting you at work if you tell them not to, nor can they discuss your confidential debt with anyone else. Additionally, they cannot threaten you in any way and cannot be verbally abusive or hostile with you.
Know Your Payment Ability
Before you get into the negotiation stage, you will need to know how much you can afford to pay in either monthly payments or in a lump sum. You should take an honest look at your current budget, your other existing bills and debt that you need to maintain payments on, and decide how much can be paid toward a payment arrangement or settlement. You may even need to adjust your monthly expenses to accommodate a larger payment to clear the debt faster.
Negotiate Your Payment
Just about all debt can be negotiated to some extent, and while some types can be negotiated much more than others, it pays to try to get a better deal before you agree to anything. If most or all of the debt in question is medical debt, there may be even more room to negotiate, as well as help and payment assistance available through many different state and local programs.
Get Credit Concessions If Possible
One of the biggest reasons that you're probably paying this debt is to get it off of your credit report, so it's worth a little extra effort to make sure that happens. Before you make any payments, get the collection agency to agree to remove the credit mark if possible. If they don't agree to that, ask them to mark the item as "paid as agreed." Whatever you can get them to agree to, get documentation of it.
Get All Offers In Writing
You need to make sure that you get everything in writing before you make any payments. This means having your potential settlement or payment arrangements detailed, as well as any concessions the collector will make regarding the credit report information.
Hold Up Your End
Once you have agreed to a payment arrangement or a debt settlement, you must hold up your end of the bargain. If you default on your settlement, not only may you be back on the hook for the whole debt, but you may have burned your only chance at a payment arrangement.
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Old Debt In Collections
It is not uncommon for holders of consumer debt to sell that debt to others, whether or not they can subsequently collect the entire amount themselves. Those who buy old debt often only pay pennies on the dollar compared to the value of the debt, but then they legally own that debt and can begin collection efforts on the entire amount.
Be sure you can obtain a debt validation letter from the creditor, if they cannot produce that, you cannot be held responsible for the debt. This includes removing the item from your credit report, as well as stopping all collection efforts and communications with you.
Sometimes, the debt is older than your state's statute of limitations, which means, you can no longer be held legally responsible for the debt. While you still technically "owe" the money, there are no legal remedies for the creditor to pursue the consumer for payment. Old debt can still hurt your credit score, but you aren't legally liable for paying it any longer.
Medical Debt In Collections
When medical bills are incurred, they can be significant, and if left unpaid, they may take longer to get to your credit report, but they will still get there eventually. Medical bills will affect your credit just like any other debt, though in some cases, they may be weighed less heavily.
While there is a mandatory 180-day waiting period before unpaid hospital bills and other medical debts can show up on a credit report, they can still be listed as a debt. If left unpaid, they will eventually be assigned to a debt collector, who will go through the usual avenues to contact you and obtain payment. This is generally when the impact on a credit score will often be seen.
One of the best ways to handle medical debt in collections is to work with the insurer to have them pay the bill. If the insurer eventually picks up the bill, the item will immediately drop off of the credit report. This may not fix the damage that has been done by the debt, but it can stop further negative credit action.
If insurance does not pay the bill, it may be possible for the patient or their advocate to have the billing negotiated to some extent. While you may not be able to completely eliminate the bills, in many cases, they can be greatly lowered. Some hospitals also have financial assistance or billing advocates that can help reduce or eliminate medical debt.
Credit Card Debt In Collections
Credit card debt in collections is one of the most common types of debt sent to collections agencies. Credit cards are commonly defaulted on and are frequently bought and sold on the secondary debt market longer than the debt's useful life. This means that if you have had old credit card debt for some time, you may have experienced zombie debt collectors trying to get you to pay off a debt that is far outside of your state's statute of limitations.
While having credit card debt go to collections means the account has been closed, it also means much of the high-interest debt that was accumulating will slow for a time. Credit card debt is often so inflated with interest and fees that consumers can easily negotiate it down to more manageable settlement amounts with collection agencies, sometimes making it slightly easier to pay off once it goes to collections.
Paying Off Debt In Collections The Right Way
Cleaning up your debt in collections doesn't have to be a difficult or intimidating task, even though most people will see it that way. For the savvy negotiator, it may even be possible to pay less than the original debt and still have it removed from their report or marked as paid. Just remember to get everything in writing, from documentation of the offer itself to any credit item concessions, and you'll be out from under that debt before you know it.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.