Collection accounts sparkle on your credit report for 7 years and 180 days. They’re one of the worst types of negative listings on your credit report. Recent or new debt collection accounts can drop your credit score significantly.
What is a debt collection account?
A debt collection account is a past due account. Usually, creditors assign or sell your accounts to collection agencies when you’re lagging behind your payments for a few months. These accounts include credit cards, utility bills, store cards, medical bills, cell phone bills, medical bills, payday loans, etc.
Usually, creditors wait for 2-3 months (60 days - 90 days) for your payments. If you don’t make payments even after getting several calls from a creditor, then he can assign or sell the account to the third party debt collection agencies.
In-house debt collections vs third-party debt collections
| In-house debt collection | Third-party debt collection |
|---|---|
| This is the first party-debt collectors. Some credit card companies have in-house debt collection department. The department calls debtors for collecting or settling accounts. | Creditors assign or sell old past due accounts to third-party debt collectors when they don’t have in-house collection department or when debtors don’t show any interest in making payments. |
| It is easier to settle debts with in-house collection department. The settlement process is quick. | It can be tough to settle debts with third party collection agencies since some of them don’t follow the FDCPA laws. It is better to hire a law firm or a debt relief company to negotiate with collection agencies |
| They don’t have a commission since everything is managed by the bank or the credit card company. | They get a commission on the basis of the amount collected on the assigned accounts. Junk debt collectors buy accounts for pennies on the dollar and try to collect as much money as possible. The more they collect, the more is their profit margin. |
Why should you try to pay off collection debts?
- Collection debts drop your credit score
- Debt collectors can file a lawsuit against you
- Your wages can be garnished if debt collectors win judgment against you
- It can be tough to obtain new credit card or loans
How to pay off your debt collection accounts
Here’s how you can try to pay off your collection debts in different scenarios.
*A good option
1. Pay your account in full
Debt collectors may not agree to delete the collection account from your credit report if you pay less than the full amount. In this scenario, debt settlement is not the best option for you. Offer to pay the full amount if the debt collector deletes the account from your credit report. Make a written request to the debt collector and wait for his response. Don’t pay a penny before the debt collector agrees to fax you a pay for delete agreement.
*The best option
2. Negotiate for a settlement
How about paying less than what you owe and get the debt collection account removed from your credit report? Negotiate with the collection agency for a settlement agreement. Offer to settle the account if the collector deletes it from your credit report.
You have to negotiate really hard since the debt collector will try to collect a substantial amount. You can negotiate over phone and if the collector accepts your proposal, then ask him to fax you the debt settlement agreement in writing.
*An ideal option
3. Approach a law firm
Ideally, you want to settle your account yourself. What if you’re not good at negotiations? A law firm or a debt relief company knows the industry news and trends. Debt relief companies have an idea of how much a collection agency may agree to reduce the payoff amount. Law firms have a team debt attorneys who know the debt settlement and debt collection laws very well. They have good negotiation skills too. So you’re likely to save more money if you leave the negotiation part to a law firm like OVLG or a credible debt settlement company.
*The last option
4. File bankruptcy
This is your last option to repay your collection accounts. You can do so under the following circumstances:
- Debt collectors are not agreeing to settle collection accounts
- You can’t afford to pay the full amount or what the collection agency is demanding
- The collection agency has filed a lawsuit against you
The ‘means test’ will determine if you’re an eligible candidate for Chapter 7 bankruptcy or Chapter 13 bankruptcy. The bankruptcy trustee will sell your nonexempt assets to pay back debt collection agencies in Chapter 7 bankruptcy. In case of Chapter 13 bankruptcy, you have to propose a repayment plan to the court for paying off your collection accounts. The court will review your plan before giving the final approval.
3 Tips to follow before and after paying off collection debts
Don’t panic when a debt collector calls you. Don’t pay money over the phone. Debt collection scams are rampant. You need to avoid them. Plus you have to pay off debt collection accounts, improve your credit score and protect your credit report. There’s lot at stake. You have to deal with debt collectors carefully.
1. Find out if you’re out of the SOL period
The SOL period refers to the Statute of Limitations period. This period starts from the first day of your delinquency in all the states but the end date varies from state to state. You can check out the statute of limitations period in your state from here. Creditors or the debt collectors can file a lawsuit against you only during this period. Remember that.
If your past due accounts have crossed the SOL period in your state, then creditors/debt collectors can’t file a lawsuit against you. So you can avoid paying off those accounts. However, those accounts will be there on your credit report for 7 years and 180 days.
2. Get your collection account validated
A lot of debtors panic after getting a debt collection call. Some pay money over the phone. Others start thinking about the payment arrangements. This is a massive mistake.
You need to check if the debt collection agency is speaking the truth. Ask the debt collection agency to validate the said account with proper evidence. You can use this sample debt validation letter to get your collection accounts validated. Don’t pay a penny before a debt collector validates your account.
3. Get your credit report properly updated
Like I told you, debt collection accounts hurt your FICO score. After you settle or pay off your collection accounts fully, take these 2 steps:
- Ask the debt collection agency to remove the negative listing from your credit report
- Ask the debt collector to update your account status as “paid in full” or “paid” or “paid as agreed” or “current”
If you want to get your collection account removed from your credit report, then negotiate for a pay for delete agreement before paying off your accounts. Here is a sample pay for delete letter you can use.
Conclusion
Collection accounts are like an itch on your back, which doesn’t allow you to sit or sleep comfortably. It’s wise to get rid of these accounts as soon as possible.
