What should I know if I have debts in collection?

Thoughtful young woman looks at papers to learn how debts in collections affect credit scores.Image: Thoughtful young woman looks at papers to learn how debts in collections affect credit scores.

In a Nutshell

If you have debts in collection, that usually means a third party is trying to retrieve payment for your debts on your creditor’s behalf. Debt collection is a federally regulated process, and you have rights that collection agencies must respect. While debts in collection can negatively affect your credit scores, the severity of the impact diminishes over time.
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Learning that you have debts in collection can add a lot of stress and anxiety to your life.

If you’ve fallen behind on your bills or debts, a debt collector may contact you. Debt collectors are typically people or agencies paid by creditors to collect on certain past due debts.

But don’t panic if you have debts in collection — and don’t ignore the debt collectors either. Instead, educate yourself about your rights, the effects on your credit, and your best options for working with debt collectors. Here’s what you need to know so you can move forward.

What does it mean to have a debt in collections?

When you have a debt in collections, it usually means the original creditor has sent the debt to a third-party person or agency to collect it. Credit card debt, mortgages, auto loans and student loans are a few types of debt that can be passed on to a debt collection agency.

Most lenders will try to collect the debt themselves before resorting to writing it off and passing the collection to another party. Typically, past-due accounts won’t be charged off and sent to collections until they’re 120 to 180 days late.

If you have debt that’s past due and you’ve been contacted by someone who claims to be from a debt collection agency, be careful. There are scammers that masquerade as debt collectors.

Here are a few telltale signs that you could be dealing with a scammer instead of a legitimate debt collector, according to the Consumer Financial Protection Bureau.

  • They withhold information. Debt collectors must give you all the information you need to verify a debt.
  • They pressure you to pay by money transfer or a prepaid card. Scammers push borrowers to use these types of payments because they can be difficult to trace.
  • They threaten you. Scammers may try to bully a payment out of you by threatening jail time, acting like they work for the government or saying they will tell your family, friends or employer.
  • They ask for a lot of personal information. Don’t ever give your Social Security number, bank account number or other sensitive information over the phone to a debt collector until you’ve verified they’re legitimate.
  • They call at strange times. If you’re getting a call from a debt collector before 8 a.m. or after 9 p.m., there’s a chance you could be dealing with a scammer.

Most importantly, don’t rush to make payments to any debt collector if you don’t recognize the debt they’re trying to retrieve. If you’re worried that you’re dealing with a scammer, ask for a company name and contact number. Then check with your original creditor to see which collector it has assigned the debt to (if any).

How will a debt in collections affect my credit?

Credit bureaus assign late payments to various categories, such as 30 days late, 60 days late and 120 days late. The longer the payment is past due, the more it can hurt your credit score. For example, a payment on your credit report that’s 120 days late will have more of an impact on your scores than a payment that’s 30 days late.

Unfortunately, a debt in collections is one of the most serious negative items that can appear on credit reports because it means the original creditor has written off the debt completely. So when a debt is sent to collections, it can have a severe impact on your credit scores. That’s why working hard to get current before an account enters collections can help your credit recover faster from a late payment.

Additionally, lenders also may consider frequency of debt collections. For example, someone who’s had only one debt transferred to collections may have an easier time getting approved for credit than someone whose credit report shows multiple debt collections.

If you already have debts in collection, the good news is that the impact on your credit scores will diminish over time. And eventually the debt collection will fall off your credit reports completely. Generally, an account in collection will remain on your credit reports for seven years.

What are my debt collection rights?

The Fair Debt Collection Practices Act is a federal law that limits what a debt collector can say and do. The law requires a debt collector to send you a written notice within five days of contacting you for the first time with the following information:

  • How much money you owe on the debt
  • The name of the collector
  • Steps you can take if you don’t think the debt is yours

If you don’t think the debt is legitimate, you can dispute it within 30 days to the debt collector or with the company reporting the debt. If you dispute a debt, the collector must send written verification, such as a copy of a bill, before contacting you again to collect payment.

Here are a few more of your debt collection rights under the Fair Debt Collection Practices Act.

  • Time and place — Debt collectors can’t contact you before 8 a.m. or after 9 p.m. unless you agree. They also can’t contact you at work if your employer doesn’t allow its employees to take personal calls.
  • Harassment or abuse Debt collectors can’t threaten you with physical violence, use obscene language or lie to you about how much you owe or your federal rights.
  • Attorney representation Normally, if you’re being represented by an attorney and the debt collector knows, they must communicate with your attorney and not you personally.

Your debt collector can’t discuss the details of your debt with anyone other than yourself, your spouse or your attorney. If they contact your friends, family or co-workers, it can only be to retrieve your contact information.

To learn more, read our full breakdown of your debt collection rights.

Should I pay off collections debt?

Whether or not you should pay off a debt in collections will depend on your personal financial circumstances and convictions. But if you’re paying off collections debt with the hope of improving your credit scores or you’re worried about a lawsuit, here are a few things to consider.

Newer credit-scoring models from FICO® and VantageScore (like FICO Score 9 and VantageScore 3.0) ignore zero-balance collection accounts. So paying off a collections account could raise your scores with lenders that use these models. But keep in mind that some lenders still use older scoring models that don’t ignore zero-balance collection accounts.

Credit-scoring factors to consider

Even if your lender uses a credit-scoring model that ignores zero-balance collection accounts, that doesn’t necessarily mean paying off your collections debt will dramatically improve your scores. If the debt collection was from six years ago, for example, its impact on your scores may have already been low.

And if you have multiple debt collections on your credit report, paying off a single collections account may not significantly raise your credit scores. But if you have a recent debt collection and it’s the only negative item on your credit report, paying it off could have a positive effect on your score.

Is the debt time-barred?

Finally, take note that if your debt is time-barred — meaning the statute of limitations (the time limit for legal action over the debt) has passed. In this case, your debt collector may no longer have the right to sue you and win a judgment. But in some states the clock can restart if you make a written acknowledgement of the debt or make a payment toward it.

What’s next?

If you’re looking for help with managing your debt, you may want to set up an appointment with a credit counselor. A National Foundation for Credit Counseling-certified counselor could help you create a debt management plan, which may reduce the collections calls you receive and limit your interest charges and fees.

Some debt collectors may be willing to negotiate a debt settlement or payment plan. If you decide to go this route, the CFPB recommends that borrowers try to negotiate their debts themselves before hiring a debt settlement agency. Here are a few reasons why.

  • Many debt settlement companies charge expensive fees.
  • Your debt collector may refuse to work with the debt settlement company.
  • The debt settlement company may recommend that you stop paying on all your debts, which can cause you to rack up more late penalties and fees and further damage your credit.
  • Since debt settlement companies often encourage borrowers to stop paying on their debts, if you work with one and take their advice, you could provoke a creditor to sue you for your unpaid debts.

If you decide to work with a debt settlement company, never agree to pay upfront fees before a debt has been settled. As an alternative to a debt settlement agency, you may want to try setting up a free consultation with a bankruptcy attorney to learn all your legal options.

About the author: Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. When he’s away from his keyboard, he enjoys drinking coffee, traveling, obse… Read more.