Anyone who has fallen behind on credit card payments, or loan payments, or other types of outstanding debt, may find their outstanding balance transferred to a debt collector. A debt collector is typically a person or agency paid by creditors to collect on certain past due debts. Having an account sent to collections can be stressful. It may include receiving regular phone calls and letters from the debt collector.
It is important not to panic if you find yourself in this situation. Rather, take a moment to understand how debt collection works, what rights you have, and what options are available to you. Here is what you need to know to move financially forward.
What is Collections?
Debt collections happen when an unpaid debt gets assigned to a debt collector. Debt collectors are often third-party companies or agencies that work on behalf of another company to collect debts. If working for the original creditor, the debt collector will receive a percentage of the debt collected. Otherwise, the debt can be sold to a debt collection agency for pennies on the dollar after you fail to pay back the debt to the original creditor. The agency will then pursue you for the debt.
When Does an Account Go to Collections?
There is no ‘set rule’ on how long it takes for your debt to go to collections. The only thing for certain is that the clock starts ticking on the debt being turned over to a collections agency the moment you don’t pay a bill. It also depends on the type of loan. Generally, credit card debt that remains unpaid longer than 30 days is turned over to a collection agency. Foreclosures or unpaid mortgages can take much longer and are dependent on laws in the state they were issued.
In most cases, lenders will try to collect the debt themselves before resorting to writing it off and passing the collection to another party. The debt is then reported to the credit bureaus as a “charge off,” meaning the original creditor has ceased efforts to recover the debt. After a debt is canceled, the creditor may send you a Form 1099-C, Cancellation of Debt showing the amount of cancellation of debt and the date of cancellation, among other things. Be sure to have this form handy when you are filing your taxes.
How Collections Works: What Happens When You Get Sent to Collections
Debt collection might vary slightly based on the company that’s collecting a debt. However, the process is basically the same. If you have unpaid past-due debt, your original creditor will typically notify you through written notices and phone calls. If you have a credit card that you stopped paying, your lender will make an attempt to contact you to get the amount current. If they are unsuccessful in getting you to pay what you owe, it will eventually stop. That’s usually when the debt transfers to collections.
The debt collection agency will then use the information on file to contact you. They may use your current address, your phone numbers and even contact information for your relatives. Personal banking information, including savings and investment accounts, may also be used to determine if you have the money to repay a debt. Some states allow wage garnishment to collect old debts.
Reputable Debt Collection Agencies vs. Scammers
Be very careful if you are ever contacted by someone who claims to be from a debt collection agency. Some scammers are known to masquerade as debt collectors. Never rush to make payments to any debt collector if you don’t recognize the debt they’re trying to collect. If you suspect you’re being scammed, ask for a company name and contact number. Then check with your original creditor to see if they have assigned the debt to a collection agency.
Reputable debt collection agencies will send letters to the address you gave your creditors. If there’s a way to see that you’ve moved, agencies can send letters to your new address in an attempt to collect a debt. Whether agencies send you letters or call, they’re required to give you specific details about your debt, including:
- The name of the original creditor.
- The amount you owe (including late fees and other charges).
- Your ability to dispute the debt in question, along with any stipulations.
The collector must also inform you that you have 30 days to dispute the debt in writing. They need to tell you the name and address of the original creditor if you request it. If you don’t dispute the debt within 30 days, the agency will consider your debt valid, and they can contact you to collect the amount owed.
Companies that follow the rules will work within the statute of limitations, based on the type of debt you owe and the state you live in. They will contact you only between 8am and 9pm, although you might get many calls in one day.
When collections agencies operate the right way you should not experience any harassment or threats. It is important to know, if a company threatens you with a police arrest, or if they tell you that someone is coming after you, then they are not acting lawfully.
How Does Collections Affect Your Credit Score?
If you have an unpaid debt in collections, your creditor can report it to credit bureaus, which can cause a major blow to your credit score. It is hard to predict exactly how much a credit note will impact a credit score because credit scores are unique and determined using a number of factors. However, a debt in collections is one of the most serious negative items that can appear on credit reports. That’s why working hard to get current before an account enters collections could help your credit recover faster.
How Long Do Collections Stay on Your Credit Report?
Generally, an account in collection will remain on your credit reports for seven years from the first delinquent date. If it hasn’t fallen off your credit report after that time, you can file a dispute with the credit bureau in question and have it removed. However, just because a debt in collections eventually gets removed from your credit score, does not mean you should ignore it or not pay it. You risk adversely impacting your credit score which could lead to being sued by the collector if you don’t pay your debt. Few experts would recommend ignoring your debt in collections. You’re always far better off negotiating a settlement plan if available.
Do Collections Ever Go Away?
Collections don’t usually just go away. However, there is a limited amount of time that debt collectors can sue you to collect on a debt. This is called the “statute of limitations” and it usually starts when you first fail to pay your debt. When the statute of limitations runs out, your unpaid debt becomes “time-barred” and a debt collector can no longer sue you to collect it.
How long does the statute of limitations last? It depends on what kind of debt it is and the law in your state — or the state specified in your credit contract or agreement creating the debt. Some states will also reset the clock and begin a new statute of limitations period if you ever make a payment or acknowledge the debt in writing.
What To Do If a Bill Goes to Collections
Once you are notified that your debt has entered into collections, there are three things you should do to begin getting out of collections:
- Confirm that the debt is yours. Before you pay anything, debt collection agencies are required by the Fair Debt Collection Practices Act (FDCPA) to send you a debt validation letter. This is an important step because it confirms if the debt belongs to you. The letter will also list how much is owed, the type of debt owed and details about the creditor. If there are any errors, you have 30 days to dispute the debt.
- Consider your payment options. You’ll typically have two repayment options. Either you will pay off your debt in a lump sum or according to a repayment plan. The option you choose will depend on your budget and the amount of debt owed.
- Begin making payments. Be sure to ask your debt collector for a written agreement before making a payment. Review the agreement carefully for accuracy and then start making payments. Make sure the collector confirms receipt of your payment and documents every single payment you make for your future records.
Don’t Forget You Have Rights in Debt Collection
A federal law known as the Fair Debt Collection Practices Act gives you rights and protection when it comes to how companies can conduct debt collection. The act protects consumers from “abusive, deceptive and unfair debt collection practices”. It limits debt collection calls before evening hours. It disallows incessant calling or communication via postcard and it prohibits the use of violence or intimidating language from the debt collector.
Remember you have the right to stop the debt collectors from contacting you if you’re being harassed for a debt that doesn’t belong to you. To stop the contact, you need to go through the same steps as if the debt was yours. Ask the collector to verify the debt, and then dispute it in writing. If the collector continues you are entitled to send a cease and desist letter, and then file complaints with the FTC.
What Happens If You Don’t Pay Collections
Ignoring and not paying debt collectors can lead to serious consequences. It is something you shouldn’t do when getting out of debt. The collection process typically becomes more aggressive the more you ignore it. Debt collectors can sue you if you ignore their calls and letters. They may win by default if you ignore the lawsuit. In that case, you may end up paying the debt as well as the collector’s attorney and collection fees. The debt collector can collect on this judgment by garnishing your wages or by placing a lien on any property you own.
Your credit score will also suffer greatly if you do not pay your debts. Unpaid debt can negatively impact your credit score for up to seven years, even if debt collectors stop contacting you.
The Bottom Line on Debt Collections
Collections are a legal way for creditors and debt collection agencies to collect money that is owed to them. You owe it to companies to pay back your debts. Otherwise, you could face a barrage of calls and letters from debt collectors trying to collect a debt.
But even if you owe money, you still have rights. You are protected against deceptive or abusive behavior. There are actions you can take if someone is harassing you to collect a debt. For example, you can file a complaint with federal agencies or your state attorney.
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