How to pay a debt in collections

A call from a debt collection agency is a call nobody wants to receive. But if you become significantly delinquent on a debt, you may need to deal with a debt collection agency in order to pay back the money you owe.

Managing debts in collection can be difficult, time consuming and stressful. It gets easier if you know the steps, so in this article we’ll go over how to make a payment to a debt collection agency and additional information you should know on your financial journey.

• Step 1: Learn how debts end up in collections
• Step 2: Double-check that you actually owe the debt
• Step 3: Calculate how much you can afford to pay
• Step 4: Contact the debt collection agency
• Step 5: Make your payment

Step 1: Learn how debts end up in collection

A collection can result from a debt that hasn’t been paid on time. If you fail to pay off a medical bill or credit card bill, for example, the original company owed may write off your debt as a loss and sell it to a debt collection agency.

Generally speaking, companies sell your debts to debt collection agencies after you become severely delinquent on a payment. While different creditors and lenders have different definitions of “severely delinquent,” in most cases accounts are sent to a debt collection agency after 90 to 180 days of nonpayment. The debt collection agency will then attempt to recover the money owed. In some cases, this could mean frequently seeking repayment via phone calls and notification letters.

How do debts in collections affect your credit?

Once the original creditor or debt collection agency reports the account in collections to a credit bureau, the account will typically be marked on your reports with a “collection” status. Unfortunately, accounts reported as being in collections can have a significant effect on your credit scores as they are typically considered a high-impact credit factor across different scoring models. Collections accounts can stay on your credit report for up to seven years, plus 180 days from the date the account first became past due. This 180 days is generally when a “charge off” occurs, which is the lender closing your account to additional charges and possibly transferring the debt to a collections agency.

The good news is that the negative impact to your scores can decrease over time, until the account drops off or is removed from your reports. For more on this — and what you can do to mitigate any negative effects — read our article on how debts in collections affect your credit.

How do debts in collections affect you legally?

A debt collection agency may or may not choose to sue you for your unpaid debt. Each state has its own statute of limitations that determines how much time a debt collection agency has to take legal action, but for many states it ranges from three to six years.

It is important to know that if you receive a summons to appear in court but you ignore it, a court can issue a judgment against you. If that happens, the debt collection agency might be able to garnish your wages to collect on the judgment, meaning that part of your paycheck or other compensation could be withheld, or “garnished,” by your employer and applied to your debt until it’s fully repaid.

If you’re receiving harassing calls about your debt but can’t get much clarity on how to pay it off, it’s important to understand your options — and your rights — before being pressured into a bad repayment agreement. If you have questions about whether you’re liable for a debt, it can be helpful — crucial, even — to consult with a credit counselor, who can advise you on the best strategy to pay down your debt, and a lawyer. If you’ve been receiving threats or repeat phone calls you may also want to review the rights afforded to you by the Fair Debt Collection Practices Act, which aims to end abusive debt collection practices by debt collectors.

Knowing how debts end up in collections is the first step. But knowing how to make a payment to a debt collection agency can be just as tricky.

Step 2: Double-check that you actually owe the debt

Credit reports are not infallible. Sometimes, lenders make mistakes about how much you owe and report the wrong information to the credit bureaus. Errors can also happen for other reasons.

If you think you see an error, make sure you reach out via dispute letter in the first 30 days to the lender that issued the inaccurate information and also to the credit bureau that’s reporting it. Many lenders and bureaus now offer the ability to dispute errors online, so it’s a good practice to notify all three major consumer credit bureaus to make sure the mistake isn’t repeated.

Step 3: Calculate how much you can afford to pay

If you’ve determined that you do, in fact, need to repay your debt, then you’ll want to start thinking about what it will cost you to do so.

Before having a conversation with a debt collector, review your budget to see how much you can realistically afford to pay.

It’s crucial to do this first, since failing to uphold your repayment agreement (or only paying part of what you owe) could restart your seven-year period of credit reporting and restart your period of legal liability.

The best payment option depends on your personal circumstances. Generally speaking, you have two payment options.

• Lump sum payment, or paying off all your debt at once, is the fastest way to resolve a collection. It’s typically the most cost-effective, too, since it could give you leverage to negotiate a lower payment amount. But be warned that settling an account for less than the full balance owed may not be ideal in terms of your credit. Since you didn’t pay off the entire debt as agreed upon originally, your lump sum payment may not have as positive an impact on your credit scores as paying the original account in full.
  
• Installment payments can help you manage the financial burden of repaying a large debt by spreading it out into monthly installments. But this option can put you at risk of restarting the statute of limitations on a debt and restarting the time period for how long the negative information continues on your credit reports.

Can I negotiate with a debt collector?

Collections debt is often purchased for pennies on the dollar, so you may be able to satisfy your debt collection agency by offering as little as 30% to 80% of what you owe.

Generally speaking, the closer the statute of limitations is to expiring, the more negotiating power you may have. Note that if you make a settlement and your lender cancels all or some of your debt, you’ll normally be taxed on any debt you didn’t have to pay. That’s because the IRS usually considers it as income.

Just remember that entering into a settlement agreement may come with consequences in terms of your credit and the taxes you owe at the end of the year.

Step 4: Contact the debt collection agency

Once you’ve determined how much you’re able to pay, the next step is to reach out to your debt collector.

While you may be tempted to let a third party manage the negotiations for you, you may want to reach out to your collector directly. Hiring a third party to settle or negotiate your collection debt can be expensive. In cases where the third party may not be reputable, it could also further damage your credit and put you at risk legally.

You can typically find your collector’s information on your credit reports from the three major consumer credit bureaus. Since your debt may have been bought and sold by multiple collectors, be sure to look at your most-current credit reports to determine which company to contact.

Credit Karma offers free credit reports from two of the major consumer credit bureaus, TransUnion and Equifax.

The next step is actually getting on the phone with an agent from the debt collection agency. In addition to agreeing on a payment arrangement, here’s what to ask for.

• The agent’s name and direct contact information — Ask for this info in case you need to speak with that agent again.
• Updates to your credit reports — If the agent can’t or won’t agree to remove the paid account from your credit reports, ask if the agent can update the account to “paid as agreed upon” once your payment(s) are received.
• A written copy of your agreement — Make sure it includes payment information and the updates to your credit reports you agreed upon.

Step 5: Make your payment

Once you’ve received a written agreement from your debt collector and reviewed it for accuracy, then — and only then — should you take the final step of submitting your payment.

Be sure to thoroughly document your payment so you can prove you’ve upheld your end of the deal. Consider paying a little extra to send it by certified mail and get a return receipt. Having this kind of documentation can not only help you prove you’ve paid your debt, but it can also help you dispute a credit reporting error if your payment information isn’t updated correctly.

What’s next?

Dealing with debts in collections can be a daunting task, but hopefully now that you have more background information and clear steps, the whole process feels much more approachable. You’ve already made progress by reading our guide, now it is just a matter of following each step to act on your debt.