Your credit scores determine everything from the interest rate you pay on credit cards and loans to whether or not you qualify for rental housing. Once your debt has been sent from a creditor to a collection agency, chances are your credit rating has already been affected by the creditor's report. However, you can take measures to reduce the impact of additional hits to your credit score from your interactions with the collection agency.
Time Frame for Disputing a Debt
The Fair Debt Collection Practices Act provides you with 30 days to dispute a debt in writing and request an investigation after a collection agency's initial contact with you. Until the collection agency provides you with proof that the debt is legitimate, it may not conduct any further collection activity. Consumers often mistakenly believe that the prohibition on collection activity includes reporting the debt to the credit bureaus – thus giving them 30 days in which to pay the debt and prevent credit damage. Unfortunately, this is not the case.
According to the Federal Trade Commission, credit reporting does not constitute “collection activity.” Because a collection agency can opt to report your debt at any time after purchasing the account, it is imperative that you act quickly to pay your debt and avoid further credit consequences.
Post-Payment Reporting
After you pay a collection agency that has already reported your delinquent account to the credit bureaus, the company updates the report to reflect the fact that your debt is no longer outstanding. If you pay the debt before the collector reports it, that does not guarantee that the company will not report the account after you pay it off. A paid collection is just as detrimental to your credit scores as an unpaid collection. Before you submit your payment, ask that the collection agency send you a statement, in writing, agreeing not to report your debt to credit bureaus after you pay it off.
Settling the Amount
Collection agencies sometimes offer debtors debt settlement agreements by which the debtor can pay less than he owes to satisfy the debt. Rather than write off the unpaid balance, however, the collection agency may sell it to another debt collector. You don't want to fight this battle a second time.
Thus, if you can afford it, paying off the debt in full is the safest course of action to prevent future credit problems. If settling the debt is your only option, ask that the company provide you with a receipt noting that your account was “settled in full” and will not be sold to another collector.
Credit Score Considerations
It isn't always possible to catch a collection account before the collection agency reports it to the credit bureaus. Although all collection accounts are inherently negative, paid debt still looks better to lenders who review your report than unpaid debt. Collection accounts can remain on your credit report for seven years.
Fortunately, the older an item is, the less impact it has on your overall score. Provided you manage your debts responsibly in the future, your credit scores will continue to recover until the credit bureaus eventually delete the collection from your report.
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Maybe you’ve recently faced a serious financial hurdle and missed making payments against a credit card balance. Or maybe you’re a few months behind on your utility bills. At first, you’ll find yourself answering phone calls from your creditors trying to get you to pay. Eventually — it might take three months or up to six — the phone goes quiet, and you think they’ve given up.
Unfortunately, it’s more likely that the debt has been sold to a collection agency, and you can be assured that they’ll try their best to collect. The creditor may have given up, but the collection agency won’t; that’s how debt collectors make their money.
In addition to being a tremendous hassle, being pursued by a collection agency will likely have a negative impact on your credit reports. Read on to learn how debts are sold to third parties, what to do when a collection agency is trying to get you to pay and how to resolve the issue.
Where delinquent debt goes: third-party collection agencies
When you can’t pay your debt, most creditors follow a similar process to increase their chances of persuading you to pay. One of the tools at their disposal is selling your debt to a third-party collection agency.
When a debt has been purchased in full by a collection agency, the new account owner (the collector) will usually notify the debtor by phone or in writing. Selling or transferring debt from one creditor or collector to another can happen without your permission. However, it typically doesn’t happen without your knowledge.
By law, a consumer must receive written notice (known as a debt validation letter) within five days of the collector’s initial attempt to contact you. That notice must include the amount of the debt, the original creditor to whom the debt is owed and a statement of your right to dispute the debt.
If you receive a debt validation letter, you may want to contact a not-for-profit consumer protection organization that can help you navigate the collections process, as it can get complicated and lengthy. For example, if a collector is unable to make satisfactory arrangements with a consumer after a few months, the individual debt may be bundled with many others and sold to another collection agency. That process can be repeated many times over, even beyond the applicable statute of limitations for the consumer’s debt.
What to do when you can’t pay back a debt
You should do everything within your power to avoid letting a debt go unpaid. Otherwise you’ll risk significant damage to your credit scores and a major blemish on your credit reports for years to come.
However, if you’re facing a financial challenge, such as extreme medical debt or an abrupt loss of income, and find that you can’t pay the debt, that doesn’t automatically mean the collection agency has a right to take everything you own. In the worst-case scenario, the agency will try to garnish your wages or seize your property. These extreme actions are only possible, however, if the contract you signed with the original creditor and state law allow for them.
The federal Fair Debt Collection Practices Act regulates the means and tactics that debt collectors may use to entice consumers to pay. It’s important to know what kind of conduct is allowed, so you can report — and avoid — debt collectors who violate the law.
For example, collection agencies cannot misrepresent themselves, the amount you owe or the actions they plan to take to get you to pay. There are limitations to the collector’s ability to seek remediation through the courts, as well as how they may add collection fees.
Still, it’s not uncommon for collection agencies to threaten debtors with lawsuits — sometimes illegally — in order to scare them into paying. If, for example, the debt is old and the statute of limitations in your state has passed, then a creditor or debt collector may not be able to take you to court. In this case, because they can’t actually sue you, the threat of a lawsuit is itself illegal.
Debt collectors can't generally harass you, contact you at work or continuously call you in the early morning or late evening. If a collector is calling at work, the Federal Trade Commission recommends alerting the agency, either verbally or in writing, that you are not allowed to receive calls there.
The best thing to do if you are ultimately unable to pay your debt is to seek legal help. If you have multiple accounts in collections and the totals are well beyond your ability to create a realistic payment arrangement, you should consult with a bankruptcy attorney to discuss your options.
You should also know that even if you pay the debt in full, the collection may still show up on your credit reports until you contact the creditor and ask them to remove it.
The thought of receiving collection calls can be extremely nerve-wracking, but with a basic understanding of your rights, your options for resolution and the ways you can go about getting help, you’ll be better prepared to meet the challenge.