How debt collection works
Debt collectors will have been called in if your creditors have been unsuccessful in recovering the debt themselves. They can attempt to contact you by phone or post, and they’ll likely list the debt on your credit report too. They’re required to give you specific information when they first contact you, or in writing within five days of initial contact, known as a debt validation notice. This needs to include the amount owed, the name of the creditor, and the option to dispute the debt if you think there’s been a mistake.
How to dispute debt collection
In some cases, you may not recognise the debt and will, quite rightly, want to dispute the fact that you owe it. In which case you can raise a dispute with the debt collector – asking for the name of the original creditor and what the debt was for, e.g. credit card (opens in new tab), personal loan (opens in new tab), etc. – and if you do so in writing within 30 days of receiving the original notice, they won’t be able to contact you again until sending verification of the debt you owe. If you’re satisfied with the proof the debt collector sends, you can proceed with negotiating the collection. If not, you can send a cease and desist letter to ask they stop contacting you, and you’re free to dispute the debt with relevant credit bureaus, either yourself or by contacting specialist credit repair services (opens in new tab).
How to settle debt collections
If you’re satisfied that the debt is legitimate, you can start negotiating with the collector. They’ll want to get as much of the debt paid as they can, but if you’re not in a position to pay the full amount, you may want to start lower and work your way up until you both come to an agreement. For example, you may want to offer to pay $3,000 of a $4,000 debt, and ask that the collector honors this as full satisfaction of the debt and cancels the remaining amount. Or, you may want to negotiate a repayment plan. Debt collectors won’t be willing to offer long payment terms, but offering to repay a portion of the debt each month can sometimes work out; using the example above, you may offer to pay $1,000 a month for four months, after which the debt will be fully repaid. You’ll want to consider your other financial obligations when negotiating a payment. If paying off the debt (or splitting it into monthly payments that are too high) means you risk being unable to cover your other credit commitments, you’ll want to negotiate a lower amount accordingly. Whatever agreement you come to, always make sure you stick to it, and you’ll want to have it in writing too – don’t start making payments until you receive written confirmation, and keep proof of the payments you make in case you receive questions about it at a later date. If you’re settling the debt for less than the full amount, bear in mind that doing so may come with tax implications: if more than $600 is canceled, it will need to be included on your tax return (opens in new tab) (you’ll be sent form 1099-C to declare it) and will be counted as income. It’s therefore important to work out if settling the debt in this way will actually work for you in the long term, or whether it might be prudent to pay the full amount and be done with it.
Should I pay off debt collections?
Typically speaking, yes. Paying off your debt is always important, even more so if the bad debt is hindering you from being accepted for additional finance, such as a mortgage (opens in new tab) or auto loan (opens in new tab). It can be one of the best ways to work on your credit rating and can improve your debt-to-income ratio (opens in new tab), and you have the added bonus that the debt isn’t hanging over your head. Once paid, the debt collectors will back off, and you can concentrate on other aspects of your finances. However, if it’s an old debt and has already fallen out of the statute of limitations – the period of time in which you can be sued – or is about to, it’s worth speaking with a legal professional before you make a payment. The same applies if the credit reporting time limit has expired and the debt is already off your credit report. This is because if you pay a portion of the debt it could reinstate the statute of limitations, whereby the creditor could potentially still sue at a later date, and it can also restart the time period during which the negative information will appear on your credit report.
Does debt collection affect credit?
Yes. Once a debt has been passed to a debt collector, it will be listed as a separate account on your credit report – and collection accounts can have a hugely negative impact on your score. Once reported, the delinquent account will stay on your report for seven years, even when paid, though paying it off will always be preferable: full payment will have the most positive impact on your credit report, but any payment is better than nothing. Another way that debt collection can affect your credit is if paying the debt forces you to let other financial commitments lapse, which can lead to further black marks on your credit profile. This is why you’ll want to make sure any collection agreement is affordable for you, though you may need to look into other ways of managing your credit obligations (opens in new tab) at the same time.
How to avoid getting to debt collection
Prevention will always be better than cure, so if you’re struggling with your debts and having difficulty making the repayments, it’s worth being proactive rather than waiting for it to get to the collection stage. One of the first things you can do is start prioritising your debts. Work out whether to pay your highest interest or lowest debt first (opens in new tab), though if this still seems unmanageable, you can look to debt consolidation (opens in new tab). This is a way of combining your various credit agreements into one, which could help to keep your commitments more manageable and may even reduce your monthly repayments in the process. In a similar vein, you may want to consider refinancing your mortgage (opens in new tab) or releasing equity (opens in new tab) to repay some of your other debts, though your ability to do this will always depend on your credit score and overall financial health. If none of these options work, make sure to speak to your creditors – many can offer leniency, particularly in the current climate, and you may find you don’t need to get to the debt collection stage after all.
