Having lingering debts can be a drag on your finances, credit score and peace of mind. But before you can become debt-free, you need to find out how much you really owe by talking to collection agencies. Although paying off the accounts in collections might not improve your credit score, it will show lenders that you’ve made good on your past debts. In fact, some lenders require that you take care of all delinquent debts before they approve you for a new loan.
What Is Collections?
When a borrower fails to pay a debt on time, the creditor can turn it over to a debt collection agency, thereby putting the debt into “collections.” Typically, your creditor will try to collect from you for three to six months, and some are willing to work out a deal for you to pay off your debt. If you don’t pay, however, your creditor might opt to work with a debt collector.
Your creditor can either assign a debt collector to collect the debt — and pay the collector a fraction of the proceeds — or simply sell the debt outright. In the latter case, the debt collector gets to keep whatever money is recovered.
How Can I Learn If I Have Debt in Collections?
To find out if you have debt in collections, take these steps:
1. Check Your Credit Report
The first thing to do to find out if you have debt in collections is review your credit report. You can obtain a free credit report from each of the three major credit bureaus — Equifax, Experian and TransUnion — once every 12 months from AnnualCreditReport.com. If you have any accounts in collections, they’ll show up as separate records on your report.
2. Find Out If a Credit Agency Tried to Contact You
Debt collection agencies only get paid if they collect from you, so usually you’ll know if you have accounts in collections. However, if you’ve moved or changed your phone number, a collection agency could be trying to reach you at an old number. If you see a collection account on your credit score, contact the creditor listed.
Find Out: How to Read a Credit Report
3. Ask the Original Creditors
If you know you have an old debt that you haven’t paid but aren’t sure whom you owe now, contact the original creditor. The creditor should be able to tell you if the debt was assigned or sold to a collection agency. If the debt has been sold, however, the original creditor might not be able to negotiate with you even if it wanted to.
4. Get Contact Info From Your Credit Report
You can learn how to pay collections by checking your credit report. Your report should contain all the information necessary for you to get in touch with a debt collection company. Collections appearing on your credit report will hurt your credit score, but calling collection agencies for information won’t even appear on your report.
What Should I Do If I Have Debt in Collections?
1. Pay the Debt in Full
The most straightforward way to deal with debt in collections is to pay off what you owe. Make sure you’re paying the right party, however. If your debt has been sold, you can’t just pay the original creditor, because the collection agency owns the debt now. Know that paying off your debt might not affect your credit score. Your credit report will be updated to show that the collection account has been paid off, but the information will remain on your report for seven years after the original delinquency date.
2. Negotiate the Debt
If you can’t pay back the debt in its entirety, you might be able to negotiate your debt by paying back a smaller amount in exchange for the creditor forgiving what remains. First, make sure you’re negotiating with the entity that owns your debt, whether that’s the collection agency or the original creditor. When negotiating, you can offer to make a lump sum payment or create a new payment plan with more flexibility. But, remember that the creditor doesn’t have to make a deal with you. If you do reach an agreement, make sure you get it in writing, so you have proof of the terms if the creditor ever comes back and says you still owe money.
3. Dispute the Debt
In some cases, the debt might legitimately not be yours, such as if you’ve had your identity stolen. If you receive a notice from a collection agency for a debt that isn’t yours, dispute it in writing within 30 days. Once the collection agency receives your dispute, it must cease contacting you until it has provided verification of the debt. You should also dispute the information with each of the credit bureaus and provide as much information as possible to show that you didn’t take out the original debt.
4. Know Your Rights
A collection agency must provide you with the following information within five days of contacting you:
- The creditor’s name
- The amount you owe
- Your right to dispute the debt and that the collector will assume it’s valid if you don’t appeal within 30 days
- Your right to receive verification from the debt collector if you dispute the debt
- Your right to request the name and address of the original creditor from the collector within 30 days
Debt collectors are prohibited from deceiving you when trying to collect a debt. For example, the debt collector can’t say you’ve committed a crime when you haven’t, falsely claim to work for the government, threaten to garnish your paycheck if it isn’t legally able to do so, or make other false threats.
Frequently Asked Questions
1. How Do Debt Collection Agencies Work?
Debt collection agencies make money by collecting delinquent debts. Sometimes, the debt collection agency acts on behalf of your original creditor and gets paid a portion of what’s recovered. In other cases, it will purchase the debt from the original creditor for a fraction of the actual value. The collector then gets to keep all of the recovered debt.
2. How Much Does a Collection Agency Pay for a Debt?
The amounts collection agencies pay for debts vary, but it can be as little as pennies on the dollar. When you’re talking to collection agencies, beware that you could be asked to pay a debt that is past the statute of limitations. Consumers can sue collectors who try to collect a debt that’s no longer within the statute of limitations.
3. Can a Debt Collection Agency Take You to Court?
Yes, a debt collection agency can take you to court. If the court finds the debt is legally enforceable, the debt collection agency could garnish a portion of your wages, seize bank accounts or record liens against your real property, such as your house. This allows creditors to get paid if your home is sold or refinanced.
Editorial Note: This content is not provided by American Express. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone and have not been endorsed by American Express.