How to Pay Off Your Debt in Collections (Without Falling Into a Trap)

 February 16, 2021
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Whether you’re late on paying debt on student loans, personal loans or credit cards, you should know that you aren’t alone. The Urban Institute found that an estimated 71 million Americans have debt in collections.

Delinquent debt is damaging to your financial health. Your credit score may be negatively impacted by a report of unpaid debt, making it harder to qualify for a loan or another financial product.

That can all be reversed, however, if you learn how to pay off debt in collections, whether by working with a credit counselor to resume repayment or by negotiating new terms. Just be cautious about how you pay off old debt in collections, as its statute of limitations could affect your choice of strategy.

How to pay off debt in collections

If you can afford to pay off your delinquent debt in one lump sum, that could be the right option. Of course, that’s not an option at all for most borrowers.

Without access to enough cash to extinguish your debt immediately, here are three tips to consider when paying off debt in collections:

1. Set up a payment plan — or negotiate a settlement
2. Proceed cautiously before paying off old debt in collections
3. Utilize a credit counseling service

1. Set up a payment plan — or negotiate a settlement

Not all debt collectors will accept a payment plan, but it’s worth asking if it’s an option for you.

After receiving notice from a debt collector, sit down and calculate realistically how much you can afford to pay each month. Having a payment plan proposal ready may make your negotiations with a debt collector easier.

The Consumer Financial Protection Bureau recommends not paying more than you can afford, as this can lead to financial struggles with other bills and potentially cause you to add even more debt. A credit counselor or attorney can help you set up a debt management plan, but don’t trust companies that claim they can settle, renegotiate or change the terms of your debt.

Your debt collector may be willing to settle your debt for less than you owe, but again, that could take more cash than you have on hand. That makes payment plans a more realistic option for most borrowers.

Once you’ve come to a payment plan agreement with a debt collector, get your agreement in writing before you make a payment to ensure that the terms of your deal are met by the collector.

2. Proceed cautiously before paying off old debt in collections

If you want to know how to pay off old debt in collections, you should first question how old the debt is.

Generally, there’s a statute of limitations on debt, which means that debt collectors can only sue and win to collect a debt for a set amount of time. The statute of limitations on debt varies based on the type of debt and the laws in your state regarding collection.

Learn your options regarding old debt — under certain laws, acknowledgment of debt or making a payment may cause the statute of limitations to start over.

Keep in mind that even if your debt’s statute of limitations has expired, collectors can still attempt to recoup the debt, and it could take longer for your credit to improve.

3. Utilize a credit counseling service recommends working with a credit counseling service that provides resources to help you with debt management.

Counselors generally review your entire financial situation and create a personalized plan for a healthy financial life. You may find these debt services for free or at a low cost at credit unions, religious organizations or nonprofit agencies.

Before you begin working with a credit counseling service, make sure that it’s accredited by either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

Credit counseling should also educate you about ways to improve your credit. A qualified counselor might help you negotiate with your creditors to have your payment status updated on your credit reports, which could boost your credit score.

Beware these debt collection traps

Before you set the strategy for your delinquent debt, be wary of collection traps. You shouldn’t make a payment on debt until you’ve documented its history. If you have education debt, for example, poring through your student loan records is a good way to find out whether the debt actually belongs to you.

Here are three specific scenarios to be on the lookout for when attempting to pay off debt in collections:

1. Paying electronically
2. Not verifying your debt
3. Not knowing your rights

1. Paying electronically

Unless a collector successfully sues or seeks a court order for access to your bank account or paycheck (garnishment), they cannot take money directly from your bank account to pay your debt.

Paying electronically can also provide collectors access to your bank account if they are given your account number. Unless legally mandated, you don’t need to give them that access.

2. Not verifying your debt

Just because you’ve received a notice from a debt collector doesn’t mean that you necessarily have debt. Mistakes can happen, which is why before you pay a debt collector you need to verify that you actually owe any or all of the debt.

After first contacting you, a debt collector must send you a written “validation notice” within five days. The notice must contain the following information:

  • How much money is owed
  • The name of the creditor you owe the debt to
  • How to proceed if you don’t believe the debt is yours

The Federal Trade Commission advises that even if you don’t think the debt is yours, you should talk to the collector at least once. This should give you the opportunity to confirm whether or not the debt is really yours. Be careful not to share any personal or financial information with the collector during this conversation.

If you think you don’t owe the debt, then you can send a letter to the collector stating that you don’t owe any of the money they’re requesting. If you do so within 30 days of getting the validation notice, then the debt collector must send you written verification of the debt before they can begin the collection process again.

3. Not knowing your rights

Just because your debt is in collections, it doesn’t mean you aren’t protected against certain actions a debt collector may take against you. The Fair Debt Collection Practices Act (FDCPA) protects you from harassment by collection agencies.

Some of these rules include:

  • They can only call you between 8 a.m. and 9 p.m., unless you explicitly choose another time to be contacted.
  • If you have an attorney representing you for a debt collection matter, the collectors should contact your attorney and not you directly.
  • If they are aware that your employer prohibits you being contacted at work by them, they cannot contact you at work.
  • A debt collector cannot harass you, make threats, call you incessantly or use inappropriate language.
  • If you notify a collector in writing that you don’t want to receive communication from them or that you refuse to pay a debt, they can no longer contact you unless they are acknowledging your communicated request or are informing you of a remedy for your debt.

Andrew Pentis contributed to this report.