Updated â€“ Nov 5, 2018
If youâ€™ve received a call or letter from a collections agency and you have reached an agreement with a debt collection agency,Â youâ€™re are now ready to make a payment but youâ€™re wondering what to do next, this guide is for you.
Before you give them your account number or write a check, make sure you protect yourself. Once a debt collection agency has your account number, they can (and sometimes do) use that information to take more money from your account. But with the right precautions, you can protect yourself.
You may be asking yourself: is this legal? Can a collection agency really just take money from your account, even if you donâ€™t give them permission? Unfortunately, the debt collection industry is a dark and murky place. Agencies regularly try to blur the lines of legality, and their sole objective is to get as much of your money as possible. Although there are a few exceptions, most collection agencies are incredibly small and scrappy.
If youâ€™re starting toÂ panic, know that youâ€™re not alone. According to a recent study by the Urban Institute, 71 million Americans are estimated to have debt in collections. Fortunately, there are laws that protect you from getting hounded by collectors and steps you can take to resolve the matter.
In this post, weâ€™ll explain how you should handle debt collectors, as well as the steps to take before, during and after repayment to avoid being ripped off. Weâ€™ll cover:
According to Rachel Kampersal, marketing communications and programs associate at American Consumer Credit Counseling, as soon as a debt collector contacts you, take action.
â€śWhether it is to confirm the debt, to negotiate the payment or settle it, [taking] action will help get the problem solved much faster than avoidance,â€ť Kampersal said.
Your rights are protected under the Fair Debt Collection Practices Act (FDCPA). You need to know what collection agencies can and canâ€™t do when trying to get money from you. â€śHarassment and false statements are prohibited under the act,â€ť Kampersal said.
Debt collectors can only call you during certain times and are required to give you a written notice of the debt. You have the right to challenge your debt, and you can even ask in writing for a debt collector to stop contacting you. The letter you send doesnâ€™t mean you no longer owe the debt, Kampersal said. But it can put a stop to unwanted calls.
Hereâ€™s a list of a few of your rights from the FDCPA:
If you believe a debt collector is violating your rights, report them to the Federal Trade Commission or the attorney generalâ€™s office. You can learn more about your rights under the FDCPA here.
Donâ€™t start making payments until you confirm the debts. â€śIf you believe the debt in your name was an error or fraud, the first thing to do is see if youâ€™re truly responsible for repaying the debt,â€ť Kampersal said.
According to Kampersal, even one payment on a debt can mean you assume responsibility. You can double-check that the debt is yours by looking at your credit report or contacting the original lender. If you donâ€™t agree with the amount thatâ€™s being collected, you have the right to dispute it under the FDCPA. Filing a dispute starts an investigation to determine if the debt is yours.
Another thing to double-check is that the collections agency isnâ€™t collecting on debt that should have been cleared. â€śThere is a bad practice among debt collectors of selling debt thatâ€™s discharged in a bankruptcy or [debt where] the statute of limitations has expired,â€ť said Elizabeth Hubbard, executive director of 1 $ Wiser Consumer Education based in Krum, Texas. â€śLegally, theyâ€™re not supposed to be collecting on this debt.â€ť
Sometimes, creditors will also sell an unpaid balance even if you made a settlement agreement. For example, say you pay $3,000 to settle a $5,000 balance and you have the agreement in writing to prove it. The creditor could sell the remaining $2,000 to a collections agency despite making an agreement with you. In this case, instead of making a payment, you need to pull out your records and dispute the balance.
Itâ€™s not uncommon for debt collectors to seek payment on old debt where the statute of limitations has expired. The statute of limitations is the number of years someone can sue you for a debt. Debt, where the statute of limitations has expired, is called time-barred debt. The collector has less power to make you repay this debt because they canâ€™t take you to court over it. You can review the statute of limitations on debt for each state here.
Hereâ€™s the important thing to remember: Agencies are allowed to contact you about time-barred debt. Itâ€™s generally advised that you do not make any payments on it. Making even a partial payment could restart the statute of limitations timer.
Not sure how old your debt is? Ask for a debt verification to include the date of the last payment. The date of the last payment is typically the start of the timer for the statute of limitations.
Pay attention to dates and stand your ground. You may still receive regular communication from an agency trying to collect time-barred debt. Donâ€™t give in to pressure tactics. Seek counsel from an attorney or credit counselor if youâ€™re unsure whether you need to pay. If collectors continue calling you about an old debt, send a written letter asking them to stop contacting you.
Youâ€™ve done your research and confirmed the debt is one you need to pay. The next step is taking a look at your budget and savings accounts to see what you can afford to pay per month toward the debt. Think twice before wiping out all your savings to repay it. If an emergency happens, you could end up relying on debt again, which can get you into more trouble.
You have a few options once you have an idea of how much you can afford to pay. You may be able to work out a payment plan. A payment plan is when you agree on an amount that youâ€™ll pay incrementally toward the debt until itâ€™s paid off.
Another option is negotiating a settlement. A settlement is when you pay a lump sum thatâ€™s less than your balance to settle the debt. As part of the settlement agreement, you may be able to have the collector delete the account from your credit report, according to Kampersal. This is called a pay-for-delete agreement.
One thing to note with a settlement is that you may owe taxes on the debt amount thatâ€™s forgiven. Kampersal suggested speaking with a tax professional before settling in case itâ€™ll have an impact on your tax filing.
Be wary of debt settlement programs that negotiate on your behalf. You may be charged a fee for the service, and thereâ€™s no guarantee that youâ€™ll get a settlement. Settlements with collections agencies can be worked out on your own.
If you run into trouble, you can seek guidance from credit counseling organizations. Donâ€™t go with any credit counseling service either. Interview counselors and check their credentials. The Department of Justice keeps a list of counselors that are approved for pre-bankruptcy courses. Bankruptcy may not be on your horizon, but these counselors may also offer basic credit counseling services. You can check out the list of counselors here.
Ultimately, the payment strategy you decide on will depend on your finances. If you go with the installment plan, Kampersal recommended avoiding an extended repayment schedule because it can increase the amount of time a negative remark stays on your credit report. All agreements made should be received by you in writing before you pay.
A collections agency may ask to make automatic withdrawals from your bank account. Do not allow this to happen. According to Hubbard, when they have access to your bank account, they could potentially take more money than authorized. We will mention this more in a section below!
You should be controlling your payments at all times and not allowing someone else to make withdrawals.
There are a few reasons why itâ€™s better to pay with certified funds than other methods.
The first is that certified funds are like cash. There can be no dispute about declined payments or bounced checks because theyâ€™re guaranteed funds. The second benefit is that both the bank and you have a record of the certified check. If the payment is ever called into question, thereâ€™s more proof to show you made the payment.
Lastly, your job throughout the process of paying a debt in collections is keeping highly detailed records of each payment and communication. If you have phone conversations where changes to the agreement are made, request a written copy of the details.
Here are the ways you should never make a payment:
Ask for a letter of completion from the collections agency stating you have paid in full. Hubbard told MagnifyMoney that consumers shouldnâ€™t ask for a confirmation letter from anyone who answers the phone at the collections agency office. The letter should come from an authorized signatory.Â If you make a settlement agreement with your agency, you get it in writing. The last thing you want is for them to come back and ask for more money.
When you pay off a debt, your credit reports should be updated to reflect itâ€™s paid off. But this may not happen right away. According to Hubbard, the collections agency has 30 days to report to the credit bureaus. If the account isnâ€™t updated within that time frame, you can contact the credit bureau and send a notice to the collections agency. Again, any contact you have with the credit bureau or collections agency should be in writing.
Typically, collections accounts impact your credit for seven years. But the length of impact may be shortened in some cases. Learn why debt in collections doesnâ€™t always hurt your credit for the entire seven years.
Even after repaying your debt, you need to hold on to your paperwork.
â€śKeep your records forever and ever and ever because debt gets sold so many times,â€ť Hubbard said. You could get a call five, 10 or 15 years from now about a debt you paid off or settled. Debt can be sold in batches, which means collectors may not go in and check every individual account for accuracy before purchasing.
The collections process can be somewhat of a free-for-all in this regard, and the onus is on you to know what you owe. It will ultimately become your word against the collection agency, and the only proof is paperwork. So, make sure you have a file and store all of your history in it.
Getting a call or letter from a collections agency can be unpleasant and even embarrassing. Donâ€™t ignore the situation and let the debt pile up. Avoidance can cause bigger problems. Instead, come up with an action plan using the steps above.
Now, we are not saying that all collection agencies are evil or have the intent to break the law. We are just saying that there is an elevated risk, and you can easily defend yourself. If something bad happens, it can be very painful. At worst, a dubious collection agency cleans out your checking account.
You may win the money back in the end, but being without cash can be very difficult. Avoid the risks by planning ahead when you make a payment to a collection agency. And if you need help, find a credit counselor or attorney who can provide guidance.
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