Helpful hints, tools and resources to answer all your money questions
4 min read
Account in Collections? Don't Panic!
Updated: Sep 8
There are many ways people find themselves in debt, including student loans, mortgages, credit cards, auto loans, and medical bills. While most consumers obtain the debt with every intention of repaying it, life may have other plans.
People lose their jobs, get sick, bite off more debt than they can financially chew, and so forth. It may become impossible to impractical to pay off such debt when disaster strikes your household. Of course, failure to make payments means that debt collectors will eventually come calling. Do you know what happens and what to do when your account goes into collections?
You’ve received a letter informing you that you have a debt in collections. It can be frightening and a little embarrassing, but the truth is that one in four Americans have a debt in collections. So, you are far from alone in dealing with this issue.
The important thing now is to take the matter seriously, understand what it means, and make the right moves to resolve the collection.
What Does It Mean When A Debt Goes Into Collections?
Once you miss a payment on a debt, the creditor will usually send you a delinquency or late payment notice, which provides you a certain period of time to return your account to good standing by paying the missed payment and any applicable late fees.
By federal law, a creditor can submit your account to a collection agency when it becomes 31 days past due. Most larger creditors will use their own internal account specialists to continue to attempt to bring your debt current over the next 60 to 180 days. Thereafter, however, the account will likely be sold to a collection agency.
The above is why it’s very important to respond to the creditor immediately, even if you can’t pay immediately. They’ll often have several options to keep your account out of collections, including deferments, late fee forgiveness, refinancing, partial payments, and so forth. However, if you don’t communicate with your creditor, it’s highly likely that your account will end up in collections.
Once in collections, there’s little to nothing you can do to keep the delinquency off your credit profile, which will impact your credit score for seven years since your last payment.
What Happens After A Debt Is In Collections?
After the shift of debt from your original creditor to a collection agency, the line of debt with the original lender closes and it opens a new trade line on your credit report. The original lender will likely stop taking payments from you and communicating with you.
At this point, letters, phone calls, emails, and so forth will be from the collection agency. In some cases, the collector may try to compromise with you in the debt. For example, if your original debt was $5,000, then they may offer to settle the account for a payment far less than that.
One more point here is that each payment you make to the collection agency basically restarts the amount of time it’s on your credit report. Remember, the seven-year rule applies to the last payment date.
Never Ignore The Problem
Collection agencies make their living from getting ‘faulty’ payers to pay their bills. They’ll call, text, email, mail, and so on nonstop. Ignoring them is a big mistake.
With each time your debt is sold, it gets higher. With each month that it’s in collections, you’re adding fee after fee. If that doesn’t spur you to pay, then the collection agency will serve you papers to appear in court.
Collection lawsuits threaten your paychecks being garnished, assets seized, and bank accounts frozen or drafted. Each state allows a different process for such lawsuits, with some states even allowing the collection agency to sue you for legal fees, court costs, and attorney fees. So, this is a potentially costly step that you want to avoid whenever possible.
If your debt collector isn’t successful, then that’s not necessarily good for you either. Debts that can’t be collected are often “charged-off” as un-collectible. This means that you’re no longer responsible for it, but it will show up on your credit report indefinitely. The IRS will also count the charged-off amount as part of your income for that year in most cases.
It’s best to speak with the original creditor or the collection agency to work out a payment plan before it gets to the above points. In most cases, the collector will be happy to work with you on a payment plan you can afford and forgive large portions of the debt, particularly when it comes to anything over the principle amount owed.
Work With The Debt Collector
Here are some helpful tips to work successfully with a collection agency:
• Verify they own the debt.
• Verify it’s your debt and the right amount.
• Monitor your credit report; if the collector is legit, then you’ll find them reporting the collection on your credit report.
• Dispute any inconsistencies.
• Leverage bulk sum payments to lower the account balance; your first offer should be 10%-15% of the account balance, but expect to negotiate up to around 40%-50% of the account balance.
• Discuss exclusions from the Cancellation of Debt IRS Form 1099-C with your accountant or tax preparer prior to negotiating debt forgiveness and discharge.
Debt collection can be daunting and terrifying. Knowing the facts will help you successfully navigate the process to get that debt resolved. Remember, to try to address the issue early with the original creditor. If it’s already in collections, then it’s time to verify and negotiate, not ignore, the debt.