Being in debt is stressful enough, but when the calls and letters begin arriving from debt collection agencies, the anxiety level can really get turned up. If you’ve fallen behind and perhaps even lost track of what you owe – and to whom – you may not even realize that your debt has gone into collections.
First, always remember that you have rights and are protected by the Consumer Financial Protection Bureau (CFPB) and through the Fair Debt Collection Practices Act (FDCPA). This is a federal law that limits what a debt collector can do in their efforts to collect on past debt(s). Some of the practices that a debt collector cannot engage in include:
- Making misrepresentations or lying about your debt, including the amount you owe
- Making threats to have you arrested
- Harass you in any way, including calling excessively or at places you do not want to be contacted, such as work
Keep this in mind as you engage with debt collection agencies. Don’t get intimidated by letters and phone calls, and instead focus on creating a plan and a solution for handling the issue as efficiently as possible.
Having a debt (or multiple debts) in collections will severely impact your credit and your overall financial wellness. Your plan should simply be to pay it off as soon as you’re able. Before you do this though, there are some steps you should take. First, before agreeing to or submitting any payment on a debt to a collection agency, find out if the debt has already passed the statute of limitations. If it has, that’s a conversation for another day with different ramifications based on if you decide to repay the debt or not.
If it has not passed the statute of limitations, however, then you can still be sued for the debt, which of course you want to avoid. At this point, you can handle your debt in three ways:
- Create a payment plan
- Pay the debt off in one lump sum
- Settle the debt for less than you owe
Each strategy has its own advantages and drawbacks, and the tactic you take will depend on your individual circumstances. Whatever your plan of action, make sure to obtain an agreement in writing between you and the collection agency to protect yourself.
Create a Payment Plan
Devising a plan for repayment of your debt will give you control of the monthly payment amount you can afford as well as a schedule that works for you. The first step is to review your finances (a great time to develop a budget, if you haven’t done so already), and determine what amount you can afford to direct towards your debt repayment. Each individual will be different; maybe it’s on a weekly, bi-weekly, or monthly basis. It could be $25 or $250. Just make sure it fits into your budget and determine the frequency you’re able to pay.
The next step is to contact the collection agency – either by phone or mail – and present your repayment plan proposal. Many agencies will be fine with this, as they primarily have an interest in recovering at least some, if not all of the debt. If you’re able to come to an agreement, then the debt collector should provide you confirmation in the form of a written document, detailing the agreement. Review this closely and ensure that the terms are as you agreed before making any payments.
This strategy can help you pay off the debt in a manner that is manageable for you. Once you pay it off and complete the agreement, it can have a positive impact on your credit report, which over time will offset the original damage done by having a delinquent debt. Just make sure you do your due diligence in reviewing your monthly budget so the amount and schedule that you agree to won’t be too difficult. If you’re unable to keep to the agreement and miss a payment, the collection agency can renege on the agreement and sue you for payment.
Make One Lump Sum Payment
Really the best way to handle paying off a debt in collections is simply to pay it off immediately with one single payment. If you have savings or investment accounts that you can draw from, it probably is wise to pay the debt and resolve the situation immediately. If that is not an option, think about if you can apply a tax refund or bonus at work towards the debt, for example. Maybe you can take on a side hustle for a few months to save the funds to make a lump sum payment.
Just make sure that you can afford to handle your debt in this manner before doing so. If you feel more comfortable keeping $1,000 in an emergency fund, then that makes sense. If you do decide to make payment in full, as previously mentioned, make sure to ask for an agreement in writing from the debt collector first. Debt is often resold and the debt collection industry is notorious for poor record-keeping, so keep this agreement, as well as a confirmation that the debt was paid in full as part of your records so that it doesn’t show up again.
Settle the Debt for Less than the Total Amount
Often when a debt has gone into collections it means that the individual is experiencing some type of hardship and cannot keep up with their monthly payments. In situations such as this, negotiating a settlement for less than the amount owed can make paying off the debt easier. This can be done yourself or by having a professional debt relief company handle the negotiations for you.
Trying to negotiate a settlement on your own will require time and in many cases, persistence, as some creditors may not have any motivations to forgive part of the debt. You’ll want to explain in detail the hardship you’re experiencing and the reason you’re making the request. In negotiating, ask for more to be forgiven than you think is even possible. For example, if you’d like 40% of the debt to be forgiven, then begin by asking for 60%. Make sure as well to get the agreement, along with the terms (total amount agreed on, monthly payment amount, months, etc.) in writing, and do not make a payment until you have the agreement in writing.
Many people find that they either don’t have the time or stomach for dealing directly with debt collectors. In many of these cases, hiring a professional debt settlement company to represent you can be worthwhile. There is a fee for working with them, but the cost is often far offset by the savings you can receive by working with them. Another benefit is that these companies have highly trained representatives that are experts at negotiating with debt collectors and can often negotiate higher savings than you may be able to obtain on your own.
If you go the settlement route, keep in mind that if more than $600 of your debt is forgiven, the IRS considers that taxable income, and you’ll likely receive a form 1099-C to report any amount over $600 on your tax returns. Make sure to consult a tax expert.
Once a debt is paid off via the debt settlement method, the creditor will then report the debt on your credit report as a “partial payment.” While not as ideal as “payment in full,” it certainly is better than having a delinquent, unpaid account on your credit.
Having a debt in collections can be stressful, especially if you’re receiving intimidating letters or phone calls. If you find yourself in this situation, first remember that you have rights under the FDCPA. Also, make sure to deal with the situation head-on as quickly as possible. There are more potential solutions for you than you may realize, and confronting the situation will help you feel more in control of it than if you continue to ignore it.