What Happens If You Get Sent to Collections and Don’t Pay?

When a financial obligation becomes significantly overdue, the original creditor may transfer the debt to a collection agency. This process typically occurs after a period of missed payments, often ranging from 90 to 180 days, when internal recovery efforts are no longer feasible. Once a debt is in collections, it can lead to various outcomes for the individual who owes the money.

Initial Reporting and Communication

When a debt is sent to collections, it signifies that a creditor has either assigned the debt to a third-party collection agency or sold it outright to a debt buyer. This action is usually taken after the account has been severely delinquent for several months. The appearance of a collection account on a credit report is a significant negative event, as it indicates a defaulted debt. This can substantially lower an individual’s credit scores, impacting their financial standing.

Upon acquiring a debt, collection agencies are mandated by federal law to send a written debt validation notice to the individual within five days of their first communication. This notice provides essential details about the debt, including the amount owed, the name of the original creditor, and a statement that the debt will be assumed valid unless disputed within 30 days. If the individual disputes the debt in writing within the 30 days, the collector must pause collection efforts until the debt is verified.

A collection agency may report the delinquent account to the major credit bureaus as early as 31 days after a missed payment. The negative impact on credit scores begins once these collection accounts are reported and can persist for an extended period.

Escalation of Collection Efforts

If initial communications from the collection agency are ignored or the debt remains unpaid, collection efforts typically intensify. This escalation involves an increased frequency and persistence of contact attempts, including more phone calls and written correspondence. Collectors aim to recover the debt through non-legal means, such as negotiating payment plans or lump-sum settlements for a reduced amount.

Debt can be sold multiple times, meaning an unpaid debt might transition from one collection agency to another. Debt buyers often acquire these debts for a fraction of their face value, with the intention of collecting the full amount. This transfer of ownership means the individual will begin receiving communications from a new entity, which is legally entitled to pursue the debt.

The continuous attempts by various agencies can be distressing, but consumer protection laws regulate how collectors can interact with individuals. Collectors are prohibited from using harassment, threats, or deceptive practices. Despite the change in ownership, the negative entry on the credit report typically remains linked to the original delinquency date, not the date of sale to a new agency.

Potential Legal Proceedings

If collection efforts do not result in payment, the collection agency or debt buyer may pursue legal action. This process typically begins with the filing of a debt collection lawsuit in court. The individual being sued receives a summons and a complaint, which formally notify them of the lawsuit and detail the creditor’s claim. It is crucial to respond to this lawsuit within the specified timeframe, usually around 20 to 30 days, to avoid a default judgment.

A default judgment occurs if the defendant fails to respond to the lawsuit by the deadline, allowing the court to rule in favor of the debt collector. Once a judgment is obtained, the creditor becomes a “judgment creditor” and gains tools to enforce collection.

Common post-judgment enforcement actions include wage garnishment, bank levies, and, in some cases, property liens. Wage garnishment allows a portion of the individual’s earnings to be withheld directly from their paycheck and sent to the creditor. Federal law limits the amount that can be garnished from disposable earnings. A bank levy permits the creditor to seize funds directly from the individual’s bank accounts. In certain situations, a judgment can also lead to a lien on real property, which is a legal claim against the property that must often be satisfied before the property can be sold or refinanced.

Broader Financial Repercussions

An unpaid collection account carries implications beyond immediate credit score damage and potential legal actions. Collection accounts typically remain on an individual’s credit reports for seven years from the date of the original delinquency. Even if the debt is paid, the collection entry can persist for this entire seven-year period, although its negative effect may lessen over time, especially if marked as “paid.”

The presence of collection accounts on a credit report can significantly impede future access to credit. Lenders often view these entries as indicators of high risk, making it more challenging to obtain new loans, such such as mortgages, car loans, or credit cards. When credit is extended, it may come with less favorable terms, including higher interest rates, due to the perceived risk. This long-term impact can affect major financial decisions and opportunities.

In some instances, if a significant amount of debt is ultimately canceled or discharged by the creditor, there may be tax implications. Canceled debt can be considered taxable income by the Internal Revenue Service (IRS). If a creditor cancels a debt of $600 or more, they are typically required to send the individual a Form 1099-C, Cancellation of Debt, and report it to the IRS. The individual must then report this canceled debt as ordinary income on their tax return unless a specific exception, such as insolvency or bankruptcy, applies.