Should I Pay a Debt in Collections or Not?
Navigate the complexities of debt in collections. Understand your choices, their financial impact, and actionable steps to make an informed decision.
Receiving a notice about a debt in collections can be unsettling. The best way to address a collection account depends on your financial situation and goals. This article provides an overview to help you navigate this challenge.
Understanding Collection Accounts
A collection account is a debt an original creditor (like a bank or credit card company) has sold or assigned to a third-party collection agency due to missed payments. A collection agency specializes in recovering overdue debts or purchasing delinquent debts.
When a debt goes to collections, it appears on your credit report, often as a separate entry from the original account. This negative mark significantly impacts credit scores, as payment history is a substantial factor. Collection accounts generally remain on credit reports for about seven years from the original “date of first delinquency.”
The date of first delinquency is when the original account first became delinquent and was not brought current. This date marks the beginning of the seven-year reporting period, regardless of whether the debt is sold to multiple collection agencies. Even if paid, the collection entry typically remains on the credit report for the full seven years, though its status may be updated to “paid collection.”
Evaluating Your Options for Debt in Collections
When faced with a collection account, you have several options. Paying the debt in full is a straightforward approach, especially for smaller balances. While paying updates the credit report entry to “paid,” the negative mark generally remains for the full reporting period, typically seven years from the original delinquency date.
Another strategy is negotiating a settlement for less than the full amount. Collection agencies often purchase debts for a fraction of their face value, which provides room for negotiation. Some consumers attempt to secure a “pay-for-delete” agreement, where the agency agrees to remove the collection entry from the credit report in exchange for payment. However, these agreements are not guaranteed or universally offered. Always obtain any settlement agreement, including credit reporting terms, in writing before making payment.
You have the right to dispute a debt if you believe it is inaccurate or not yours. This involves sending a debt validation letter to the collection agency, requesting proof that the debt is legitimate and they are authorized to collect it. Understanding your state’s statute of limitations for debt collection is also important. This legal time limit, typically three to six years for consumer debts, dictates how long a collector can sue. If expired, the debt is “time-barred,” meaning a collector cannot legally sue, though they may still attempt to collect through other means.
Ignoring a debt in collections carries potential consequences. You may receive continued collection calls and letters. Collection agencies may pursue legal action, potentially leading to a judgment against you that could result in wage garnishment or bank account levies. An unpaid collection account also continues to negatively impact credit scores and can hinder access to new credit, loans, housing, or employment opportunities.
When deciding among these options, consider factors like the debt’s age and the precise amount owed. Your current financial situation, including available funds and income, will influence whether paying or settling is feasible. Your credit goals, such as seeking a mortgage or a new car loan soon, may prioritize a quicker resolution to mitigate credit score impact.
Taking Action on Collection Debt
Once you decide on a course of action for a collection debt, specific steps can help ensure it’s executed effectively. If paying or settling, it is crucial to obtain the agreed-upon terms in writing before remitting any funds. This written agreement should detail the payment amount, date, and any stipulations regarding reporting the debt to credit bureaus, such as updating the status to “paid in full” or “settled for less than full amount.”
When making a payment, consider using methods that provide a clear paper trail, such as a money order, certified check, or a secure online payment portal. It is generally advisable to avoid providing direct access to bank accounts initially, especially for new agreements, until the written terms are fully confirmed. After payment, regularly monitor credit reports to ensure the collection account status is updated accurately. Maintaining meticulous records of all correspondence and payments is also important.
If you dispute the debt, send a formal debt validation letter to the collection agency. This letter should be sent via certified mail with a return receipt requested. The agency then has a period, typically 30 days, to provide documentation validating the debt. During this validation period, the collection agency is generally prohibited from continuing collection activities or reporting the debt to credit bureaus.
If you decide to ignore the debt, it is still prudent to prepare for ongoing collection efforts. This includes documenting all communication attempts from the collection agency, such as call times, dates, and the content of voicemails. If a lawsuit is filed, it is important to seek legal advice promptly, as ignoring a summons can result in a default judgment against you.