Unpaid debts can quickly cause problems with your credit score and negatively impact your ability to borrow.
Late fees and higher rates of interest can also create problems for anyone struggling to manage their finances.
Eventually, unpaid bills can be sent to collections. Once debts have gone to debt collectors, you will need to deal with them quickly or face legal action.
In this article, we will help you understand how debt collection works, how to deal with debt collectors, and how you can protect yourself if you experience abuse or harassment from debt collectors.
How does debt collection work?
If you have a bill that you can't pay, the lender may sell the debt to a collection agency.
At that point, the lender writes off the debt and the collection agency comes after you to get their money.
There are collection agencies that buy debt for pennies on the dollar. If they can collect even half the total debt from you, their return on investment can be quite substantial.
It is important to consider the timeline of how debts become judgments:
- You agree to take on the debt.
- You find yourself unable to pay it.
- Interest and non-payment penalties pile up. Even if you're not adding to the debt, it's growing.
- Ultimately the original lender sends the debt to collections. According to CNBC money writer and expert Megan DeMatteo, the original lender will try to collect from you for about six months.
- You will be contacted by a collections agency.
- You can negotiate a payment plan.
- You may be notified of a judgment against you that can put your bank account at risk.
Once a debt collection agency owns your debt, they can take legal action against you and may get a judgment against you that will allow them to garnish your wages and seize your bank account.
Before they take you to court, they may attempt to contact you in a variety of ways. However, debt collectors have rules they must follow.
What debts go to a collection agency?
As a general rule, unsecured debts are the most common type to go to collections.
Secured debts that have collateral attached, such as a car loan or a mortgage, generally go to repossession or foreclosure.
How to know if it's a scam
Debt collectors must comply with certain rules. Debt collectors have to give you information about the debt.
They must provide you with written confirmation of any claims that they make over the phone. For this reason, it's critical that you do not volunteer any information or offer any repayment over the phone.
How to deal with debt collectors in 5 steps
Follow the following steps to learn how to deal with debt collectors:
Step 1: Keep phone communication to a minimum
Per the United States Federal Trade Commission, there are many scam debt collectors out there.
If you get a phone call from someone trying to collect a debt, never offer any form of payment or even a confirmation that you owe the money.
Even if the debt collector is legitimate, it's possible that an error has been made and you have been assigned debt that isn't your responsibility.
During your conversation, always ask for confirmation in writing. Ask them to read off the address they have on file for you. Never give them an address if they cannot provide you with one.
Step 2: Act only on written documentation
Once you get written confirmation back, carefully review your records to make sure that the debt is truly yours.
If you have cosigned for a loan in the past, contact the person for whom you cosigned to make sure that the debt is outstanding.
Unfortunately, if the person you cosigned for lets the debt go to collections, you are responsible for it.
Step 3: Act quickly to address the problem
It can take 6 months for the original lender to send something to collections. Unfortunately, the debt collection agency can take action against you within 30 days.
If you can set up a payment plan that works for both parties, do so once you have written confirmation.
Step 4: Negotiate
When dealing with debt collectors, always be polite. This can be extremely challenging.
Financial stress and pressure can be exhausting and you may feel like shouting at a debt collector for calling you about something that is already causing you anxiety.
Debt collection agencies can directly offer you options to negotiate your debt. Once you can confirm that the debt is accurate and is your responsibility, you may be able to:
- Negotiate a lower total payout
- Bargain for a payment plan that is more manageable than the former debt
- Negotiate a lower interest rate
Do not enter into these negotiations too early in the process. The first phone call should just be about confirming the debt and arranging for a written confirmation.
Once you have the paperwork in front of you and can confirm what is truly your responsibility, you can start to negotiate a payment plan that suits your financial situation.
Step 5: Review the Statute of Limitations for your state
According to The Balance, it is important that you find out the statute of limitations on your debt.
Depending on the type of debt and the state in which the debt was incurred, the debt collector may not be able to get a judgment against you.
It is also important to note that you may still be considered responsible for the debt. Bad debt can impact your credit score for a long time. However, if the statute of limitations has run out, the debt collector can't garnish your income.
How to protect yourself from debt collectors
Abuses occur in the world of debt collection. The Fair Debt Collection Practices Act was set up to protect consumers from abuses by debt collectors. Their rules are quite straightforward:
- If you are being threatened or verbally abused, you have the right to file a complaint. Document any communications you receive from debt collectors.
For example, if you are getting phone calls that address anything more than the facts about the debt, make sure you track the time of the calls and the exact language.
The FDCPA is a law that protects consumers from harassment and abuse by debt collectors. It limits and defines:
- How often a debt collector can contact you
- How they can talk to you
- What you can do if you are abused or harassed
If a debt collector calls you non-stop, threatens you, or uses abusive language, they are in violation of the FDCPA. They cannot threaten to contact your place of work or have you arrested.
How do I file a complaint?
If you are abused or harassed by a debt collector, experts with Debt.org recommend you make sure you keep records and note when you're called, what is said and, any threats that are made.
If the abuse is severe enough, the debt collector may owe you money. Here are the steps you can take to file a complaint:
- Your first step per experts with Convergent is to file with the Consumer Financial Protection Bureau. You don't need to share any personal information with any agency when filing for protection. The goal is to bring the actions of the debt collectors to light.
- Next, file the same information with the Federal Trade Commission, or FTC. The FTC creates the rules that financial organizations must follow and can change policies to protect other victims of collection abuse. The Attorney General of your state can also help protect you and other citizens of the region. Each state is different, but if you enter the name of your state and "attorney general" you should at least be able to find their website and get started.
- Finally, reach out to the Better Business Bureau. Debt collectors who are unwilling to follow the rules and regulations of their industry need to be governed by other for-profit businesses, and the BBB can apply a pressure on abusive collectors.
Should I file for bankruptcy?
If you have suffered a life-changing event that led you into debt, it may well be that filing for bankruptcy protection is a worthwhile step. For example, if you have a mortgage, car payments, and household bills that you can cover and a large medical debt that you cannot, bankruptcy protection may be a wise choice.
However, if taking on debt that you cannot pay has become part of your lifestyle, you can make changes that will allow you to avoid bankruptcy. These changes include building new skills as well as changing your mindset about money.
The speed of your response to a call from a debt collector can prevent you from having to file for bankruptcy. If you can get written confirmation and accept that a particular debt is your responsibility, you can set up a payment plan before the debt collecting agency goes to court to get a judgment against you.
Once a debt collector has a judgment against you, they can garnish your wages. If your income is from social security or you receive monthly veteran's benefits, Nerdwallet reminds you that your income can't be garnished from the source. However, your money can be seized once it lands in your bank account.
How does debt collection affect your credit score?
Once a debt goes past due, late payment notifications will impact your credit score. Your credit score will take a further hit if the debt goes to collections.
- If you can pay off the debt before a judgment is incurred, you can reduce the impact on your credit score more quickly than if you suffer garnishment or seizure.
- If you file bankruptcy, your credit score may take be impacted for years to come.
It is important to note that you will never be notified by a credit reporting agency about a debt.
While a debt that is allowed to go to collections will have an impact on your credit score, credit reporting agencies have no say or control over your debt. Anyone claiming to be contacting you directly from a credit reporting agency is a scammer.
As you work through the process of paying off debt collection agencies, keep an eye on your credit score.
There is a lag time between when you pay off debts and when your credit score starts to climb.
Recap
When you are dealing with debt collectors, make sure you look for written follow-ups from your conversation. Write down the time of the call and the name of the debt collector. If you don't see a letter within 7 days, it may have been a scam call and you may be the victim of identity theft. Never volunteer information, such as your address, during a call from a debt collector.
If you do receive a letter, confirm that the debt is yours. You may be able to work out a payment plan of a reduced amount or get extended terms to lower your monthly payment.
You may find that you need to seek protection and guidance from a bankruptcy attorney. Always wait for written confirmation of your payment plan before you start paying.
Track when you are contacted and any verbal abuse you suffer. Reach out to your state Attorney General's office with your complaint.
If you are sued by a debt collector, respond. Such a lawsuit can lead to wage garnishment or the seizure of your bank account.