Updated on Wednesday, November 18, 2020
When a debt goes unpaid, creditors often pass it off to a collection agency that will contact you in various ways in order to get you to pay up. Meanwhile, your credit score will take a significant hit when you default, limiting your access to new credit. Here is a closer look at what you can expect when a bill lands in collection, as well as how to dispute collections for money you donâ€™t owe and how to work with an agency to eliminate the debt.
A debt collection agency is a company that collects past-due funds from borrowers on behalf of creditors. Some creditors use an internal collections department or subsidiary, while others will send your account along to an outside agency if your bill is in default, or considerably overdue.
Once a bill is sent to collections, the collection agency will contact you for payment and youâ€™ll no longer hear from your creditor or be able to pay them directly. The agency will then work to recover unpaid funds in exchange for a portion of your payment.
Itâ€™s likely your bill wonâ€™t suddenly end up in collections. Instead, youâ€™ll hear from your creditor multiple times and over three or four months before your account is finally turned over to collections. However, itâ€™s also possible for a debt to be sent to collections without notice because creditors are not required to inform you. This is sometimes a complaint with medical bills.
What to do if a debt collector contacts you â€¦
Your debt goes to collections after your creditor has repeatedly failed to get you to make payments. The agency will then step up efforts to contact you, and youâ€™ll start receiving calls and letters, sometimes persistently.
Hereâ€™s a timeline of what to expect when youâ€™re late paying bills:
|What happens when youâ€™re late on payments|
|Days your payment is overdue||What happens|
|0-30||Your creditor will likely contact you to let you know your payment is past due. You may also be charged a late payment fee.|
|31-60||Your creditor will report your missed payment to the major credit bureaus, possibly causing your credit score to drop 90 to 110 points.|
|61-90||After two missed payments, youâ€™ll likely be charged a penalty APR on credit card debt.|
|91-120||Your creditor may enlist the help of a debt collection agency and also report a default on your account. This can drop your score another 50 points.|
|120+||By now, your debt will likely be in collections. The debt collection agency may threaten to garnish your wages or take you to court, depending on the laws in your state.|
Letting a debt go into collections can have a devastating effect on your credit score. However, the drop will also depend on how much other negative information is in your credit history. If you have excellent credit, you might see your score drop to as much as 150 points. If your score is already low, youâ€™ll likely see less of a drop.
Like most negative credit information, collection accounts can stay on your credit report for up to seven years. However, paying off a debt in collections wonâ€™t necessarily improve your score. Thatâ€™s because some lenders â€” like mortgage lenders â€” still use older scoring models when assessing your eligibility for credit. Unlike newer scoring methods, older methods keep a record of negative collection information even if the debt has already been paid off.
You have certain rights when it comes to how debt collectors can behave. For example, by federal law, collectors are required to send you a debt validation letter within five days of contacting you. The letter needs to detail the amount owed, the name of the creditor and how to dispute the debt. If you receive a letter like this â€” and donâ€™t think the debt is legitimate â€” you have 30 days to challenge it in writing.
As youâ€™ll see below, federal law also gives you the right to request in writing that a debt collector stop contacting you. A collector is exempt from this requirement only if they need to inform you of an impending lawsuit or if theyâ€™re stopping efforts to collect your debt.
The Fair Debt Collection Practices Act (FDCPA) is designed to protect consumers from unfair and deceptive practices by debt collectors. It covers most debts, other than business debts, and sets forth rules for how and when a debt collector can contact you.
Under the FDCPA, debt collectors cannot â€¦
If a debt collector violates any of these rules or any laws that apply to debt collection in your state, report their behavior to the following â€¦
Under the FDCPA, you also have the right to sue a debt collector in court as long as itâ€™s within a year after the violation. If you win, you might be compensated for any distress you experienced, as well as any wages you might have lost. Keep in mind, however, that suing a debt collector for illegal behavior doesnâ€™t necessarily erase any debt you might have owed.
If you have been contacted about a debt that you do not believe is yours, follow these three steps:
The most straightforward way to handle a debt in collections is to simply pay what you owe. You wonâ€™t need to negotiate, and it might improve your credit faster than some of the options described below.
Coming up with a lump sum might prove difficult, however. If thatâ€™s the case, you may need to:
Once youâ€™ve paid off your debt to a collection agency, you can expect the agency to stop calling you. You can also expect an amendment to your credit report to show the collection account was paid in full. Check your credit report to make sure your information was updated.
Itâ€™s likely your debt collector may offer you a payment plan that lets you pay off your balance with fixed payments over a fixed period of time. If this option might work for you, get an agreement in writing, and make sure your account will be reported as â€śpaid in fullâ€ť once your last payment is in.
if your debt is old, be cautious with a payment plan. Time-barred debt means you are no longer legally obligated to pay it because it is past the statute of limitations in your state. However, making even a single payment might reset the clock and allow a debt collector to take you to court for the full amount you owe.
If youâ€™re short on cash and donâ€™t qualify for a loan, a debt settlement will let you repay the owed debt for less than the total amount. Debt settlement can be harmful to your credit, however, so ask the debt collector to have any negative information related to the debt removed from your credit files as part of a debt settlement agreement.
If you ignore a debt in collections, a debt collection agency will continue to contact you, and your failure to respond may cause their actions to escalate. With time, a collection agency might threaten to have your wages garnished or take you to court. With a court order, a collection agency might also be able to take money directly from your paycheck or bank account.
Thatâ€™s not the case with time-barred debts. For this reason, if your debt is old enough and cash is tight, it might make sense to wait until you are no longer legally liable for it. The caveat: If your debt were to get sold again â€” possibly to another collection agency â€” a new collection account might appear on your credit report.