6 Steps to Take If Your Debt Goes Into Collections

Whether you’ve dealt with collection agencies in the past or you’re new to the process, here's how to get your debt out of collections.

If you’ve fallen behind on your bills, there’s a good chance a debt collector may have contacted you or will be contacting you shortly. A debt collector works for a collection agency who bought a debt from a creditor to whom you owe money. Since their job is to collect the money, they may plague you with phone calls until the account is fully paid off.

Here are six steps to consider to get your debt out of collections.

1. Don’t Stress

Whether you’ve dealt with collection agencies in the past or you’re new to the process, receiving threatening calls and statements in the mail (more on this in a minute) can be stressful and scary. It is important not to stress or panic. You are not alone! Millions of debts have gone into collections before. However, it is also important to note that, unless you take action, the debt in collections will not go away. Avoiding the situation will only make matters worse. Failure to act can result in a judgement, which can lead to garnishment of your wages or a frozen bank account.

2. Know Your Rights

It is important to know your rights when it comes to dealing with debt collectors as, unfortunately, it is not uncommon for some to abuse their power. The Fair Debt Collection Practices Act states that debt collectors are not permitted to use abusive or obscene language, make any threats of violence or harm, repeatedly use the telephone to annoy and harass a debtor, call before 8 a.m. or after 9 p.m., or discuss your debt with a third party. They must also respect your request to not call you at work, if you have indicated that.

A debt collector may only contact other people regarding your debt that you have approved, such as an attorney or a family member. (Note: They can call other third parties, but only for local information and they can’t say they’re a debt collector.) If you feel a debt collector has violated your rights, you should file a complaint with the Federal Trade Commission.

3. Gather Information to Validate the Debt

Gathering all the information you have regarding the debt in question is a good start. Consider checking your credit report for any inquiries or anything that may seem like suspicious activity. (You can view two of your credit scores for free on Credit.com.) If the debt in collections is in fact yours, gather information regarding the original creditor who sold the debt, as well as any evidence of your payment history with that creditor.

Believe it or not, it’s quite common for collection agencies to make mistakes regarding debt they claim they are owed. You can verify a debt within 30 days after a collection agency has sent you a validation letter.

4. Pay in Full or Arrange a Repayment Plan

If your validation notice proves the debt is in fact yours, there are a few actions you can take. One option is to pay the debt in full. Many may decide to take this option to stop the collection calls and turn to fixing their credit. Unfortunately, this is not possible for everyone. If you are unable to pay your debt in full, consider negotiating a repayment plan with the collection agency. Creating a repayment plan that works for you can help you settle your debt while simultaneously improving your credit score.

5. Negotiate a Deal

If funds are tight and you find yourself to be a negotiator, you may be able to lower the amount you owe to the collection agency. While this may save you some money, it’s not always easy or possible. List any hardships you have that may have prevented you from making your payments. When negotiating, it’s important to be firm with your offer, keep notes of all conversations and take note of who you’ve spoken with. If you’re able to negotiate a deal, consider getting everything, including your payment schedule, in writing.

6. Seek Help

There’s no shame in asking for help. Before you take steps to pay your debt in full or negotiate a deal, consider hiring a debt-settlement law firm (Full Disclosure: I am one). These legal professionals have experience dealing with collectors and can negotiate on your behalf. Just make sure to do your research and find someone reputable.

Knowing what a debt collector can and cannot do will help protect you from unfair practices used by agencies to collect on the debt. You should also consider meeting with a financial adviser who can help you understand your financial situation so no future debts end up in collections. Understanding why your debt went into collections in the first place can prevent it from happening again.

Debt collector calling ad nauseam? You can find 50 ways to deal right here.

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5 Risks of Working with a Debt Settlement or Debt Relief Firm

If you’re deep in debt, you may have looked into getting some outside help to find relief. Frequently, your search for aid will bring you to debt settlement firms.

Debt settlement firms negotiate directly with your creditor to reduce your debt. If they succeed in settling your debt for a lesser amount, you will then be required to make one lump-sum payment, effectively wiping out your obligation.

Using these firms may sound like a lifesaver to someone struggling to pay off many debts at once. But debt settlement firms can actually cause more harm than good to your finances if you aren’t careful.

“Based on all the evidence we’ve seen, it is extremely rare that anyone benefits from using a debt settlement firm,” says Andrew Pizor, a staff attorney with the National Consumer Law Center.

Before you agree to work with a debt settlement firm, it’s important to know the risks:

5 Risks of Working with a Debt Settlement Firm

  1. You will have to stop paying your debts. When you begin working with a debt settlement firm, many firms will encourage you to stop paying your debts and start paying into a third-party bank account. The idea is that you will eventually build up enough money in that account to be ready to make a lump-sum payment when the firm succeeds in convincing your lender or collections agency to settle.

This, of course, means that your accounts are going to become increasingly delinquent. It can take up to 36 months to fully fund a debt settlement firm account, according to the Federal Trade Commission.

While you are not paying your debt, your creditor can send your account to collections or even file a lawsuit against you before the settlement firm gets a chance to negotiate. You could also be responsible for any interest, late fees, and legal fees that have accrued over that time as well.

2. They may not succeed in settling your debt. Once you have saved up enough money to make a lump-sum offer to the creditor, the debt settlement firm will attempt to enter negotiations. What they may not tell you is that some creditors will not work with these firms as a rule. That means it’s possible that after you’ve saved enough money for the payment — meanwhile, allowing your accounts to become severely delinquent and your credit score to tank — you could be left without a resolution at all. To avoid this, call your lender or collections agency directly to ask if they work with debt settlement agencies before you sign up for their services.

3. They’ll take a portion of your debt savings. If the firm is able to successfully negotiate, they will often take a cut of your savings in return. For example, if you owe $10,000 and they are able to negotiate a lump-sum payment of $8,000 with $2,000 of your original debt forgiven, the firm would take a percentage cut of that $2,000.

4. Your credit will tank. It is important to note that debt settlement shows up on your credit report when it is reported to the credit bureaus. It will serve as a red flag to future lenders that in the past, you have not paid your debts in full. This could result in higher interest rates, smaller lines of credit, or even failure to get approved for credit at all.

5. You could face a hefty tax bill. If the amount forgiven is $600 or more, you will most likely have to report it as taxable income. Let’s look back at our earlier example. When that person settled their $10,000 debt for $8,000, the lender effectively forgave $2,000. To the IRS, that forgiven debt could be treated as additional income and you could owe taxes on it.

What to Look for in a Debt Settlement Firm

There are six things you should consider red flags when it comes to debt relief services, according to the FTC:

 

  • The company charges any fees before it settles your debts
  • The company advertises that they are part of a “new government program” to bail out personal credit card debt. There are no such programs.
  • The company guarantees it can make your unsecured (credit card) debt go away
  • The company tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
  • The company tells you it can stop all debt collection calls and lawsuits
  • The company guarantees that your unsecured debts can be paid off for pennies on the dollar

Almost all states have some form of regulation for debt relief services. Some states ban them altogether.

A debt settlement firm may be licensed to operate in your state, but that does not mean they are necessarily the best for your needs. Because state licensing agencies are not federally regulated, quality standards can vary widely from state to state.

What should you look for, then?

A best-case scenario, according to Pizor, is finding a company that only takes a percentage of your debt reduction in exchange for their services. “This setup helps better align their interests with your own,” Pizor says. If you do well, they do well.

How to Avoid Debt Settlement Scams

Most debt settlement firms focus on unsecured consumer debt, like credit card debt. The most common scams in these situations involve telemarketing. You’ll receive a call from a company posing as a debt settlement firm that promises to reduce the amount of debt you owe as long as you pay an upfront free. They may even tell you that you don’t have to pay a fee until later as long as you’re saving money in a third-party account.

The latter sounds legitimate, but in both these situations, the supposed debt settlement firm can easily run with your money. There was a flurry of these telemarketing scams following the 2008 financial crisis, prompting the FTC to add further federal regulations under their Telemarketing Sales Rules.

If you can’t sit down with someone in person, it’s difficult to judge their legitimacy. In these situations, it’s best to just hang up.

Another tactic scammers perpetrate is using a lawyer as a front. This lawyer may be licensed to practice in your state, but will outsource your debt woes to companies across the country, or even the world, that have no legal background.

In order to avoid this scam, make sure you can sit down with the lawyer face to face in their office. Pizor recommends asking probing questions to get a feel for their legitimacy, including, “Who will be working on my case?”

If the lawyer or a paralegal in their office will be doing the work, that is much more acceptable than someone they cannot immediately supervise in person, or someone without a background in law.

Scams also frequently happen in the student loan sector. You’ll often see settlement firms advertising that there is a “new government program” that could help you settle your student loan debt. This is tricky because there are legitimate government programs that can help those with federal student loans defer payments or even forgive their remaining debt, but you should never have to pay anyone a fee in order to access these programs.

In late 2014, the Consumer Financial Protection Bureau prosecuted two companies that were preying on those with student loans.

Try Negotiating Your Own Debt Settlement

As long as you’re aware of the effect it may have on your credit, you can negotiate a settlement on your own. Many creditors have a floor for how much they’ll reduce your debt in favor of a lump-sum payment. This floor applies to debt settlement firms and consumers alike. By entering negotiations without a third party, you can save yourself the fees and potential victimization that you would risk by working with a debt settlement firm.

There are two important things to remember before you settle your debt:

  1. You will likely need to provide a lump sump payment right away. It’s unlikely a debt collector or lender will accept installments. Also, having the ability to make a lump sum payment could give you additional bargaining power.
  2. As we mentioned before: If the debt is settled for a lesser amount, you may be taxed on the portion of the original debt that was forgiven.

Consider Paying Your Debt in Full

Debt settlement leaves a scar on your credit report that will take years to fade. If possible, attempt to negotiate a lower interest rate and/or longer terms that may decrease your monthly payment. Just be aware that a longer term may lower your monthly payments but increase the amount of interest you pay over the course of your loan, even if your interest rate goes down or stays the same. However, you’ll more likely be able to afford your payments and possibly save your credit report.

That being said, some debts may have passed their statute of limitations in the state in which they originated. Once that statute of limitations has been passed, it is no longer possible for the lender or collections agency to sue you for those unpaid debts. Furthermore, they may have already fallen off your credit report. However, if you make any further payments, the clock will restart and the debt will be revitalized. Consult a consumer law attorney or a credit counselor before deciding whether to make a payment on an old debt.

 

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Help! A Debt Collector Isn’t Working With Me

debt-collector

Paying off a debt can unfortunately be easier said than done. Usually the struggle is related to the debtor’s financial well-being. (You probably wouldn’t owe money if you could pay it back, right?) But there are times when a collector can gum up the works.

You’ll want to, of course, verify all collection accounts before paying. But if you do owe, here are a few worst-case scenarios you may run across when trying to repay a debt and what you can do.

1. They Won’t Accept Payments

There’s no specific provision in the Fair Debt Collections Practices Act stipulating that a debtee accept payment, said Troy Doucet, a consumer attorney in Columbus, Ohio — though you’ll rarely, if ever, encounter one who will give you a hard time about paying in full. “Most of them get a piece of the pie,” he said, so debt collectors will be more than happy to take the payment (and their commission).

It’s more likely you’ll run into problems when trying to pay a debt for less than you owe. And, unfortunately, “so long as the debt collector is asking for the correct amount of money, they’re not legally obligated to negotiate with you,” Doucet said.

You might up your odds of negotiating a payment plan by asking questions, taking notes, addressing issues calmly and seeking outside assistance from a reputable credit repair company. And if you are dealing with a rogue collector who for whatever reason won’t let you pay back in full, you may want to contact a consumer attorney. He or she could potentially file a claim against the party in question for violating other provisions of the FDCPA or for being in breach of contract, Doucet said.

2. You Can’t Track Them Down

Your credit report(s) should list any collection account reported to the credit bureau in question. A telephone number is also provided with each account when it’s available, so you might want to pull a copy from each credit reporting agency to start. If a number is listed, great. If not, you can try searching online for the phone number, email or address of the company on your report. You can also try contacting your original creditor, Doucet said. They may be able to verify who they sold the debt to and provide you with the proper contact information.

If the debt collector is not open to negotiating, the original creditor might still have an interest in the debt and be willing to work out or facilitate a payment plan, Doucet said. You can try disputing the information with the credit bureaus, citing your inability to pay, he added. They will kickstart an investigation and could incite the collector to settle or at the very least turn up some valuable contact information.

Remember, collection accounts can do big damage to your credit scores, so it’s in your best interest to get them resolved or, if they’re inaccurate, removed. You can go here to learn more about disputing credit report errors. And if your credit has suffered due to a collection account, you can improve your scores in the long term by making all future loan payments on time, keeping debt levels low and limiting new credit inquiries until your score rebounds. You can track your progress by viewing your two free credit scores each month on Credit.com.

[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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What You Need to Know About Settling a Credit Card Debt

6 Credit Cards That Can Help Get Your Debt Under Control

People in credit card debt have several options for getting out of it, but none of them are simple. For example, using a loan to consolidate debt at a lower interest rate requires you to have good enough credit for a personal loan. If you want to tackle it the old-fashioned way (paying off as much debt as you can, as fast as you can), you may need to make extreme changes to your budget or significantly increase your earnings.

You could also look into settling your credit card debt for less than you owe, but there are a lot of consequences consumers need to consider before choosing this option.

How It Works

If you can’t make your minimum payment on your credit card, but don’t want to declare bankruptcy, settling the debt for less than you owe might be a good option for getting out of debt. You can either negotiate the settlement with your original creditor or pay a debt settlement company to do it for you, but either way, things are likely to get worse before they get better.

“The account in some cases would need to fall at least 60 days past due before a creditor would consider a settlement,” Christopher Viale, president and CEO of Cambridge Credit Counseling in Agawam, Massachusetts, said. That means your credit score would suffer from the negative payment history. (If this happens to you, read our guide on how to improve your credit score.)

Viale said most creditors will offer a settlement for 50 to 70 cents on the dollar of what you owe. Even though you won’t pay the full amount of your debt, you’ll need to settle it in a lump sum, which can be a lot of money.

Some creditors might offer a payment structure, but it might be a short term (with high payments) and will probably not be as discounted as the lump-sum settlement, Viale said. If you enter a debt settlement program with a for-profit company, you will likely make payments into a special savings account for several months until you have enough for a lump-sum settlement. But, in the meantime, your debts will be delinquent or in default.

“I think the most important part is understanding how the settlements work in the first place,” Thomas Nitzsche of ClearPoint Credit Counseling said. He said ClearPoint encounters a lot of consumers who start working with debt settlement companies without understanding that their payments won’t go to their creditor until they have enough for the lump sum and are surprised when they start getting calls from debt collectors or see their credit scores suffer.

Things to Keep in Mind

When negotiating the settlement, make sure you get the agreement in writing before making the payment and written confirmation once the debt has been settled. It’s not unheard of for people to receive debt collection notices on a previously settled debt and, if this does happen, you want to have proof to challenge it. (Check out these 14 questions you should ask a debt settlement company before signing any agreements.)

“If it gets sold somewhere else and if you don’t have the actual evidence that it was settled, you wouldn’t be able to refute a new trade line on your credit report,” Viale said. Keeping good records is an important part of the debt settlement process, as well as confirming that the settlement has been reported to the major credit reporting agencies.

Speaking of credit reports, remember that a debt settlement won’t totally solve your credit woes.

“On the credit report, they could expect to see a severe delinquency on that account for the duration of the reporting period, which is 7 years,” Nitzsche said. “And then the account will also be marked as settled, instead of paid in full, so if someone were manually reviewing their credit report they would see that.”

Not only could that affect your ability to get credit in the future, it could also impact your relationship with current creditors.

“Sometimes when a lender sees that you have settled with another lender, they may become concerned,” Randy Padawer, consumer education specialist for Credit.com partner Lexington Law firm, said. Many creditors conduct regular account reviews and look at your credit report in the process, so they may see the debt settlement and use that to make decisions about doing business with you. “They may close the account. They may enforce a default APR. There are lots of things in that regard that can happen and consumers need to know about these things.”

On top of all that, there’s a potential tax liability for debt settlement. If the difference between your total debt and the settlement exceeds $600, you can expect to receive a 1099-C, indicating you need to pay taxes on the canceled debt.

If you’re looking at your credit card balances and wondering what’s the best way out, debt settlement warrants careful consideration.

“Attempting to settle your debt is better than simply declaring bankruptcy, which will disrupt your credit reports and scores and for a longer period of time,” Padawer said.

Think about the potential credit consequences and if an alternative plan, like working with non-profit credit counseling agency or figuring out a way to tackle your debt on your own, would result in less damage to your overall financial health. As you weigh your options, remember you can get a free credit report summary every 30 days on Credit.com, to see how your debt currently affects your credit scores and how they could be affected by your debt-payoff solution.

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How Does Settling a Debt Affect My Credit Score?

out_of_debt

Outstanding unpaid debts can do big damage to your credit score, so it’s a good idea to try to resolve them as quickly as possible. Creditors and debt collectors may be willing to work out a repayment plan or even settle the debts for less than what you owe. But can paying this lower amount cause extra damage to your credit?

Unfortunately, the answer is yes.

“Generally speaking …. paying in full as soon as possible is the best action to take in terms of … preserving the credit score,” Barry Paperno, a credit expert who blogs at Speaking of Credit, said in an email.

A debt settlement, conversely, could have a negative effect on your credit score.

“The precise impact of a debt settlement on the score will depend on how this specific information is reported to the bureaus as well as on the remaining information on the credit report,” major credit scoring model FICO said in an email. “FICO research on millions of credit files has found that consumers who do not pay off their loans per the original terms of the agreement represent higher risk to lenders, and as such, if the debt settlement is reported in the credit file with an indicator that the account was paid for less than the full amount owed, that can be viewed as a derogatory indicator by the score.”

An Important Caveat

But that’s not to say that settling for less isn’t your best course of action. Failing to make good on your balances could cause a creditor to take further adverse action against you. They might charge off the debt or resell it to a collection agency. And both collectors and creditors could sue and ultimately secure a judgment against you to get repayment for the debt. 

Newer credit scoring models, including FICO 9, ignore paid or settled collections. These scores, however, are yet to be in widespread use, so there’s still a good chance a collection account will do more damage to other versions of your credit score.

And, when it comes to judgments, “the impact … on the FICO Score is primarily driven by their presence as opposed to their status (e.g. paid-in-full vs. settled),” Can Arkali, principal scientist at FICO, said in an email. “So, if the debt can be satisfied in advance of the judgment filing, that could prevent a more adverse impact to score which might arise if an additional judgment is posted to the credit file.”

In other words, “damage control … i.e. paying as much as you can as soon as you can” should be a major consideration for consumers looking to resolve unpaid debts, Paperno said.

Deciding What to Do

In weighing your options, it’s a good idea to ask the creditor or collector in question how they plan to report any settlement they are offering to the three major credit reporting agencies. You can also try asking if they will remove the collection account in exchange for payment.

If you negotiate a deal, obtain written confirmation of your agreement. And, once you have paid, keep an eye on your credit reports to be sure the account is appearing as agreed. (You can do so by pulling your credit reports for free each year at AnnualCreditReport.com; You can also see what effects the resolution may be having on your credit scores by viewing them for free each month on Credit.com.) If you see the debt is being reported inaccurately, you can file a dispute with the credit bureaus. You can go here to learn more about disputing credit report errors.

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