Imagine you got sick a few months ago, and put your medical bills on a credit card. But then life got in the way — you had unexpected travel costs or you had to replace your AC unit — and you put all of that on your credit card bill, too. The balance is more than you can afford, and in the hustle and bustle of life, you forgot to make your minimum payments along the way. Now your phone rings multiple times a day from numbers you don’t recognize. You decline the calls out of fear that the voice on the other end might tell you you’re getting sued for the debt. You’ve stopped checking your credit score. The thought of seeing how much of a hit the debacle is taking on your score makes your stomach turn. Having an account sent to collections can be stressful. But consumers have options — and rights — when going through the process.
This mini-guide will go over the following:
- What is Debt Collection?
- When Do Accounts Get Sent to Collections?
- What You Should Do Once An Account is Sent to Collections
- How To Rebuild Your Credit Score
What is Debt Collection?
Debt collection is the process of unpaid debts getting assigned to a collections agency. These agencies then take responsibility for collecting the debt on behalf of the original company; or, sometimes, the agency buys the debt and then collects it on behalf of itself.
According to Experian, lenders can collect debt in four ways:
- Contacting you on their own,
- Hiring a collection agency to collect,
- Selling revolving debt to a collection agency who then when work to collect it, or
- Repossessing items associated with installment loans (for example, a car on a delinquent auto loan), selling the item at an auction and then selling the remaining debt to a collection agency.
When Do Accounts Get Sent to Collections?
If you don’t pay a bill, the clock starts ticking on the debt being turned over to a collections agency. The amount of time that passes before the debt is released to collections depends on the type of loan. Unpaid credit card debt, for example, is typically turned over to an in-house collections agency after more than 30 days of remaining unpaid. According to Experian, this typically occurs “within a few months of the original delinquency date.” Foreclosures, or unpaid mortgages, can take much longer — and are dependent upon laws in the state they were issued.
After the company makes its own efforts to resolve the debt, it will eventually turn it over to a debt collections agency and be reported to the credit bureaus as a “charge off,” meaning the original creditor has ceased efforts to recover the debt.
What You Should Do Once Your Debt Is In Collections
Realizing you have debt in collections can be scary. You’ll likely be informed via a letter in the mail, or a collector will start calling you. Once you’re notified, there are a few different paths you can take to resolve the debt.
Leslie H. Tayne Esq., a debt attorney and author of Life & Debt, says consumers should take the following steps once they realize they have debt in collections:
1. Stop and take a deep breath
Tayne says a lot of her clients panic after receiving a debt collection letter. Many want to immediately pick up the phone and call the creditor to explain the debt, but she says this isn’t in their best interest. According to Tayne, collectors are well-trained and have the advantage in the situation, whereas consumers are disadvantaged and may be cornered into an obligation to pay the debt in full.
Instead of immediately calling to try and resolve the issue, she recommends consumers take a moment to evaluate the situation and the path of resolution they want to go on. “Think about the letter you received,” Tayne says. “Ask yourself, Do I owe the money? What financial position am I in to pay this debt? What am I prepared to discuss on the phone?”
2. Decide what you want to do
If you know the debt is yours, you do have the opportunity to negotiate a settlement. The CFPB recommends creating a “realistic repayment proposal” that is based on how much you can afford in payments each month, after accounting for bills, other debt payments and emergency costs. If the debt doesn’t belong to you, you can dispute it.
Keep in mind that debt falls under a statute of limitations in each state. This means a collector cannot sue you for a debt that is older than a certain number of years, which the CFPB says ranges from three to six years, depending on the state. If the debt is close to the end of the limitations, the collector might be more willing to negotiate with you. If you are unsure of whether the statute of limitations has passed, the CFPB recommends contacting an attorney in your state.
3. Call the collections agency
After evaluating the debt and coming up with a plan, it’s time to contact the collections agency. Consumers have 30 days from the initial communication about the debt (for example, the first letter received explaining the debt is in collections) to call the collector and ask for the debt to be verified in writing. The collector must return your request before it can start trying to collect the debt again.
While on the phone with a collector, Tayne recommends taking notes throughout the conversation and detailing important information like who you are speaking to, the current balance and rate of interest.
If you opt to negotiate the debt, Tayne doesn’t recommend giving an amount of how much you’re willing to pay off. Instead, let the collector make the first move.
“You can say something like, “Is there an option to settle this debt? What are you willing to offer me to settle this debt?” Tayne says. “I’m not a fan of making the first offer.”
4. If you’re overwhelmed and can’t handle it on your own, hire a third-party to help
Negotiating debt on your own, or even just calling a collector, can be intimidating. Those who are too emotionally distraught over the debt have the opportunity to seek a third party to help. Services that help with debt settlements include debt attorneys or debt settlement companies.
Some collectors refuse to work with the latter, but are obligated to work with an attorney. Do your research and always know what the total cost will be to hire help.
How to Rebuild Your Credit Score
Once debt in collections has been fully resolved, consumers should focus on rebuilding their credit score. This process can take months, if not years, depending on how hard a score was hit due to bills in collections. But with effort and patience, a score will eventually recover.
Consumers rebuilding their credit after an account is sent to collections should try the following strategies:
- Pay all of your bills on time. Payment history is the largest contributing factor to your FICO score. Whether or not you pay your bills on time comprises 35% of your overall score — even more than your amounts owed. While rebuilding credit, it’s important to make every single payment on time. Many financial products offer autopay features, which debit your bank account each month on the bill due date — take advantage of this option to help keep your payments on track.
- Keep credit card balances low. Now that you’re debt free, or have manageable monthly payments toward debt, it can be tempting to reach for credit cards and start the cycle of debt over. Instead, pay off balances each month in full, if possible. Not only will it help strengthen your credit score, but it will help you save big in interest. According to Experian, the average credit card interest rate, excluding 0% introductory rates, is 13.80%; on a $1,000 balance, that can equal $138 in interest charges alone.
- Report your rent payments to credit bureaus. Individuals with extremely low credit scores can benefit greatly from reporting positive rental payment history to credit bureaus. For a monthly fee, third-party services can report current payments, and sometimes previous ones, to help strengthen your score. Read more on reporting rental payments to credit bureaus here.
- Consider a secured credit card. A secured credit card requires you to put down a deposit to open the card. These cards are best suited for consumers with poor credit who can’t get approved for unsecured cards. To read more click here.