Anyone who has seriously fallen behind in paying their bills has most likely experienced those uncomfortable phone calls from debt collection agencies. You might avoid answering your phone, letting messages pile up in your voicemail.
Sooner or later, you will have to deal with these collectors in order to get back up on your feet.
Debts that remain unpaid can cause a great deal of stress and you might not even understand how you ended up on the radar of debt a collection agency. As confusing as this might be, you do have to get beyond the intimidating calls and letters to figure out what happened and how to come up with a solution to end the nightmare.
How Did I End Up On A Debt Collector's List?
There are numerous ways this could have happened. Maybe you were not able to pay off a medical bill or an increasing credit card balance. Or maybe you forgot to pay an old phone, cable, or utility bill. Maybe you defaulted on a loan. In any case, the original company holding the original debt has sold your debt to a debt collection agency and written it off as a loss - this is called a chargeoff. This is a very common practice if the original company has tried to get your payment but have failed repeatedly. Selling your account usually happens when you become seriously behind in payments. Although creditors and lenders have their own definitions of “seriously behind”, most will fall in a range of 90 to 180 days of delinquency.
So, the result? The new debt collection agency holding your debt will now try and recover the money owed, including nonstop phone calls or letters in hopes of wearing you down. Debt collectors can be mean, nasty, and harassing. They may even attempt to call your place of work, family, or friends.
Debt Collectors Will Have An Affect On Your Credit Score
Whether it's the original debt holder or a debt collection agency, they will most likely report your account to the credit bureaus. This account's status will be marked as in “collection”. In turn, this can have a serious detrimental effect on your credit score.
Exactly how many points your score will drop depends on the actual credit score being used (for example a FICO 8 score versus a VantageScore 3.0) but will be considered a high-impact factor among the almost any scoring model. Not only that, but the higher your starting score, the more points will drop off your credit score.
Keep in mind that these collection accounts will not drop off your credit reports anytime soon. These accounts will usually remain on your reports up to seven years along with another 180 days from the time the account first became past due. The date the account first became delinquent is called the "date of first delinquency".
On a positive note, the negative impact on your credit score will start to decrease over time and the collection account will eventually fall off or be removed from your credit report.
How Do My Debts In Collection Legally Affect Me?
Each state has its own unique statute of limitations to determine how long a debt collection agency has to take legal action. This is usually between three to six years, but your legal risk exposure all depends on whether a debt collector chooses to sue for unpaid debts or not. Some collectors won't attempt to sue if they determine they have a small chance of winning, or a small chance of collecting your debt even if they win. Other reasons they might not sue is their legal costs may outweight the benefit of recouping the debt.
Experts stress that if you are served a summons to appear in court, then show up! If you ignore the summons, the creditor may win by default and end up garnishing your wages. In other words, if the debt collector sues and wins, part of your paycheck or other compensation can be withheld by your employer and applied to your debt until it is paid in full.
If you are receiving harassing phones calls but you're not able to pay your debt, there are options to stop this kind of harassment. You should understand your options as well as your rights before being forced to sign off on a really bad repayment agreement. Let's take a look at what your first course of action should be.
1. Stop And Make Sure You Really Owe This Debt
Even if you are ready to clean up the payment and move on with your life, you must stop and look at your credit reports to verify you really owe this money, to begin with. Mistakes are made, so it's worth it to double check.
Credit reports can be wrong and in some cases, lenders make mistakes about what you owe and have given credit bureaus the wrong information. There are other mistakes that have happened for other reasons as well.
If you find an error, reach out to the lender who provided the inaccurate information and the credit bureau that has reported it. It's also a good idea to contact all three of the major credit bureaus to make sure this mistake does not happen again.
You should also review your rights by the Fair Debt Collection Practices Act which is in place to end abusive debt collection practices by debt collectors. If you would like to dispute the validity of your debt to the collector, it is within your legal right to do so. Many people have disputed their personal debts, and the debt gets removed from their credit report if the collector cannot properly prove they have the legal right to collect from you. DisputeBee can help you generate these dispute letters, and it should be your first line of defense against debt collection agencies.
If you are being harassed by a debt collector, there are steps you can take to stop it. According to the Fair Debt Collection Practices Act, a debt collector cannot conduct practices that push consequences which are harassing, oppressive, or abusive to anyone in connection with the collection of the debt.
Understand that if you are receiving threats and harassing phone calls, you should contact someone legal assistance before agreeing to a debt payment plan. You should contact your state Attorney General's office, the Federal Trade Commission, and the Consumer Financial Protection Bureau to report these offenses. If your state has laws regarding debt collection that differ with the Fair Debt Collection Practices Act, your Attorney General's office should be able to clearly explain how they differ.
2. If That Fails, Determine How Much You're Able to Pay
If you discover that you do need to repay the debt and you were not successful in challenging the validity of the debt, you should start considering what it will cost to pay this debt off. Before discussing anything with the debt collector, take a closer look at your budget and find out how much you can realistically afford to pay them.
This is extremely import because if you fail to live up to the repayment agreement or only make a partial payment, your seven year period for how long a debt can be reported to the credit bureaus will start all over again along with your period of legal liability.
Depending on your own personal circumstances, you should choose the right payment option that will work for you. Here are the two options:
Lump Sum Payment. The fastest way to clear up the debt you owe is to make a one-time payment for the entire amount. It's less expensive and gives you a foothold to negotiate a lower one-time payment. Keep in mind that agreeing to a lower amount than the full balance may not work in terms of your credit. Because you didn't pay the entire original debt, the lump sum may not have a positive impact on your credit scores vs paying the original amount in full.
Installment Plan. This is the best way to help you manage the financial load from a large debt by spreading it out over a period of time with installments. The risk here is that it can restart the statute of limitations on the debt and the seven year time period for the length of time the negative information stays on your credit reports.
3. You Can Negotiate With A Debt Collector!
You may be able to satisfy your debt with as little as 30% to 80% of the balance. The closer you are to the statute of limitations expiring, the more leverage you will have. If you come to a settlement and your lender chalks off some of your debt, you will probably be taxed for the amount you did not pay. The IRS usually considers this amount of money as income. If your income is low and you have issues, negotiating lower payments is perfectly OK. Just keep in mind, there might be issues in terms of your credit score and the taxes you will owe at the end of the year.
4. Contact The Debt Collection Agency
Once you know how much you can afford to pay, it's time to contact the debt collector. You really should reach out to them directly, and in writing or over the phone if you are comfortable with that. If you are tempted to have a third-party take care of the negotiations for you, they can be quite expensive and you must decide if this third-party is reputable. If not, it could damage your credit even further and you could be legally at risk. If you do call the collector on the phone, do not admit to the debt or answer any questions or divulge any information unless it is directly related to your payment agreement or solution. Collectors will often times attempt to get you to admit to your debt when sometimes they know they don't have all the required documentation. If they get your admission on recording, then this may make it easier for them to sue you and less likely to respond to negotiation attempts.
If your debt has been sold to multiple collectors, make sure you examine your most current reports to find out whom you should contact. Once that has been established, then contact the appropriate debt collection agency. If you are agreeing on a payment arrangement, this what you need to ask for:
You need the agent's name and how to directly contact them if you need to speak with them in the future. If the agent can't or won't remove the paid account from your credit reports, ask them to update your account to “paid as agreed upon” once your payments have been received.
Get a written copy of your agreement, payment information, and updates to your credit reports that have been agreed upon.
5. Make Payments
Once you have received your written agreement and looked over it carefully and thoroughly, you can start making the payments agreed upon. Always document your payments to prove you have held up your end of the agreement. You should send your payment via certified mail with a return receipt. This will show that you are making your payments. It can also help you dispute credit reporting mistakes if your payment information is not updated properly.
In conclusion, settling your debt with a collector is not going to be the most pleasant thing you do - but not ignoring it will be better for you in the long run. Hiding from collectors will only make things worse.