How to Pay Off Debt in Collections

Dealing with debt in collections is never fun, and we don’t blame you if you’re feeling pretty down about it. However, there’s a silver lining to every storm cloud. There are ways to pay off collections that are effective and ultimately freeing. Here’s how to pay off debt in collections.

1. Confirm the debt is yours

First thing’s first: You want to document everything that happens when communicating with debt collectors. The more information you have documented, the better: Save emails, transcribe phone calls and mark the dates and times of all communication you have with the debt collecting agency. This is a vital step — because if anything goes wonky, you’ll want to have proof of what has been said and done.

Once you’re ready to track every bit of communication between you and the debt collector, it’s time to confirm that the debt is actually yours. When a debt collector contacts you, they’re required by law to provide details about the debt in the form of a debt validation letter. This letter must include the amount of the debt, your name and address, the original name of the creditor to whom the debt is owed, how to contact the debt collector and more.

The collector must provide those details within five days of its initial contact with you. Keep in mind that you have some responsibility here too: If you think the debt isn’t yours, you must dispute it with the agency within 30 days of initial contact. If you fail to dispute the debt within 30 days, the debt collector will assume the debt is valid and begin asking you for payments.

To dispute the debt, you must contact the debt collection agency in writing. Make sure you keep a copy of the letter and mark the date it was sent; you can add an extra layer of security and send it by certified mail. Once you do, the agency is required to provide additional information that it thinks proves the debt is yours. During that time, it’s not allowed to contact you about the debt.

The Consumer Financial Protection Bureau has sample letters for disputing debt or asking for more information about a debt from a collector.

2. Understand your rights

When it comes to paying off debt in collections, a boxing principle applies: Protect yourself at all times. That means knowing your rights so that debt collectors don’t overstep their bounds.

By law, there are limitations on what types of debt can be sent into collections and the circumstances under which it can be collected. The statute of limitations on debt depends on where you live and the type of debt it is. Generally speaking, the time period is between three and six years, though it may be longer in some states. The clock on those limitations begins at the last moment of account activity, which is usually the last payment made.

If your debt is time-barred, that simply means a debt collector cannot sue you to get payments — however, you can still be contacted about the debt.

Another helping hand when trying to pay off collections is the Fair Debt Collection Practices Act (FDCPA). The FDCPA prohibits debt collectors from harassing you or using deceptive practices to collect payments. The FDCPA protects you in the following ways:

• Bars abusive behaviors. Debt collectors are not allowed to harass or threaten you.
• Limits contact. Collectors can only contact you between 8 a.m. and 9 p.m. your local time. They also cannot contact you more than seven times during a seven-day period.
• Bans false claims. Debt collectors cannot use fake documents to force you to pay, lie about how much you owe and more.
• Requires debt verification. Debt collectors must provide evidence that the debt they’re collecting is yours.

3. Determine how you’ll pay the debt

Once you’re ready to tackle your debt in collections, you’ll need to consider how to budget to pay off debt. Try cutting back on unnecessary expenses, like subscriptions that you don’t even use, to free up some extra cash.

With your budget adjusted, you basically have three options: pay in full, pay a settled amount or pay over time. No matter what route you take, we have three words for you: negotiate, negotiate and… negotiate. Collection agencies will almost always work with you, because as much as it might seem that they love hounding you for cash, they’d rather just get some money and move on.

Here’s a look at the three options to paying off debt in collections:

• Pay in full: If you can afford to, paying your debt in full is a great option. That’s because the debt will be marked “paid in full” instead of “settled” on your credit report. While paying off your debt in full likely won’t may not improve your score by much, it will show lenders that you are more creditworthy.
• Pay a settled amount: Some collection agencies will give you a deal if you agree to pay a lump sum. (After all, these companies want their money, so they’ll take what they can get.) Do some math and see what you can afford, and don’t offer more than you can realistically pay. Once you have a number in mind, send your proposal in writing. If you want, you can also look into a debt relief agency for help. Keep in mind that debt settlement affects your credit.
• Pay over time: If you can’t make a lump sum payment, the next best choice might be to pay a certain amount over time. The benefit of this is not having to come up with a large chunk of cash — but the main downside is you likely won’t get offered as much of a discount by the collection agency.

4. Rebuild your credit

When you have a debt in collections, it can hurt your credit score. Lenders will see you as unlikely to pay your debts, and thus your chances of getting a mortgage, a good credit card or another financial product will suffer. That’s why it’s important to pay off your debts if you can. Oh, and collections can stay on your credit report even if you pay it off. It will eventually leave your report, but only after seven years.

Once you do pay off your debts in collections, you need to work on rebuilding your credit. That means paying all of your bills on time and keeping credit card balances at zero (or at least extremely low), as well as only applying for new credit when it’s absolutely necessary. And if you have a credit card without an annual fee that you don’t use, keep it open — an unused-but-paid-off credit card will lower your credit utilization ratio, and that’s a good thing. Further, be sure to regularly check your credit report for any errors. But above all, be patient: If you keep at it, you will see your credit score improve over time.