How to Pay Off Debt in Collections

Paying off debt in collections can be stressful and scary. Phone calls from collection agencies can leave you embarrassed and unsure of what to do next. The worst thing you can do is hide and do nothing.

First of all, know that you are not alone. According to the Consumer Finance Protection Bureau, 23.5% of Americans have a debt in collections as of the first quarter of 2022. It’s more common than most people think.

Secondly, collections can be taken care of in a few simple steps. Let’s go over how to pay off collections effectively and possibly reduce the damage to your credit score.

What is debt collection?

Debt collection is when creditors or collection agencies seek to recover unpaid bills from borrowers. When you fail to make payments for 90 to 180 days, creditors may transfer or sell your debt to a debt collection agency. The agency then attempts to recover the money owed through phone calls, letters, or even filing a lawsuit.

What to do when you find out debt is in collections

When you discover that a debt has gone into collections, it’s essential to act promptly and strategically. Do not be intimidated by the collector or bullied into making a payment you can’t afford. When a collector calls, be sure to ask the following:

• The name of the original creditor
• When the debt occurred
• The name and contact info of the agency and representative you’re speaking to
• For a debt validation letter
• To be contacted in writing only

Do not admit to the debt or agree to pay before you verify it is actually yours.

Double-check that you actually owe the debt

The first step in how to pay a bill in collections is to confirm that you actually owe the money. Creditors do make mistakes. You have 30 days from initial collection calls to contact to verify the debt is yours.

Check your records – credit reports and bank statements – and ensure the amount is correct. You can also contact the original creditor to confirm it’s the right collection agency. You may not need to pay a debt that is not on your credit report as it probably isn’t yours.

Request a written validation notice from the collector. The debt validation letter should include:

• The name of the original creditor
• Amount owed
• Your name and address
• How to contact the agency

The collection company is required by law to provide these details within 5 days of contacting you.

If the debt is not yours, you should dispute it. Send a dispute letter to the collector. Once they receive the letter, they cannot try to collect until they confirm the debt. Reach out to the lender who reported it and the bureau that has it on record. Also, notify the other credit bureaus to make sure the mistake isn’t repeated.

Check your state’s statute of limitations

Check your state’s statute of limitations on debt collection. Most debts cannot be collected after 3 to 6 years have passed. If the debt is time-barred, meaning the statute of limitations has expired, you may not be legally required to pay it. However, making any payment or even verbally agreeing to pay can restart the statute of limitations.

Figure out how much you can afford to pay

Review your monthly budget and see if there’s anywhere you can realistically cut back. Then, determine how much you can allocate towards a credit collection services payment.

Once you have a clear picture of your financial situation, it’s time to contact the collection agency. Be honest about what you can realistically afford, and don’t agree to payment terms you can’t meet. Failing to uphold a payment agreement can lead to more trouble.

If possible, aim to settle the account with a lump sum payment, which can sometimes result in paying less than the full amount owed.

Contact the collection agency

Who do you call to pay off collections? Start by looking at your most current credit reports. There should be a phone number for the collection agency. Or you can check letters and phone calls you’ve received from collectors. It’s important to learn how to find out what debt collectors you owe to avoid paying the wrong agency.

Once you’ve identified the agency, reach out to them directly to discuss possible payment options. Have an offer ready and start by negotiating the terms you want.

Try to work out a deal

When you know how much you can afford to pay and are ready to make an offer, call the collector. You have two repayment options: either a lump sum payment or setting up a payment plan.

Lump sum payment

If you have the means, offering to pay off your account in one large payment can be the fastest and most cost-effective way to get out of debt. Collection agencies often purchase debts for pennies on the dollar. This means they may be willing to accept a lump sum payment that is only 30% to 80% of what you actually owe. They also appreciate getting the money immediately. The closer you are to the statute of limitations expiring, the more negotiating power you have.

A lump sum payment for less than the full amount can hurt your score if the collection agency reports it as “settled” and not “paid in full.” You can also be taxed on forgiven debt over $600. The IRS considers this taxable income.

Set up a payment plan

Setting up a payment plan is a practical approach for how to pay off collections without straining your budget. With a payment plan, you agree to make monthly payments that fit your budget until the account is paid off.

The risk with a payment plan is that you may restart the statute of limitations and period of credit reporting – how long the negative mark is on your credit report.

Negotiating medical debt

If you have medical bills in collections, you might be able to negotiate a reduction in the total amount owed. Contact your medical provider directly and ask about programs to eliminate your bill or reduce the balance.

You may be able to set up low or interest-free payments and avoid having your account sold to a collector in the first place.

Put the agreement in writing

Once you have an agreement, get it in writing. Include how your account will be updated on your credit report. This will help protect you if the collection agency claims you haven’t met your payment obligations.

As part of the agreement, you can ask for the collection account to be removed from your credit report entirely or reported as “paid in full.” Some agencies may be willing to remove negative marks from your credit report if you agree to pay in full in one lump sum or through a payment plan. This is known as a “pay for delete” agreement. It will help your credit score, but collection agencies are under no obligation to do this.

Make your payment

Once you’ve negotiated a payment agreement and have it in writing, it’s time to make your payment. There are multiple ways to pay, but the most secure is to mail a check via certified mail so you get a return receipt.

You can also pay off debt in collections online. Visit the collection agency’s official website. Look for a secure payment portal where you can enter your payment information.

Whichever way you pay, keep records of payments, including receipts and confirmation letters. Also, request a letter of compensation from the collector. This documentation can be vital if any disputes arise.

After making your payment, monitor your credit report to ensure the account is accurately updated to reflect your payment. It can take up to 30 days for your credit reports to be updated.

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When does debt get sent to collection?

Accounts are typically sent to collections after you miss multiple payments – 90 to 180 days past due. When creditors can’t collect, they either sell the account to a collection agency or hire one to recover the funds. This transfer to collection accounts marks the debt as delinquent, which can negatively impact your credit score.

How does debt collection affect your credit score?

Any payment more than 30 days late appears on your credit report as a negative mark. These marks hurt your score since payment history is the most important factor in all scoring models.

Debt collection does further damage to credit scores as your account is flagged with collection status. This can decrease your score by hundreds of points. Exactly how far it falls depends on the credit scoring model used and where you started. Generally, the higher the score, the further you fall.

The negative mark will stay on your report for up to seven years – even when you pay it off. The good news is the negative effect on credit scores will decrease over time.

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Bottom line

Paying off collection accounts isn’t fun, but hiding from them will only make the situation worse.  Understanding how to pay collections effectively involves several key steps: verifying you owe the money, figuring out what you can afford to pay, negotiating a deal, and making timely payments. By taking these actions, you can pay your bills and move on with your life.

If you’re not sure what you can afford, talk to a nonprofit credit counselor. They can help you set up a budget, work on your credit score, and answer any personal finance questions.