What happens when you have debt in collections?

When you stop making payments toward your debt -- whether it's a credit card, student loan, car note, mortgage or even a medical bill -- you’re at risk for that debt heading straight to collections. This means that debtor is taking your nonpayment more seriously and resorting to other, more binding tactics to get its money.

Having debt in collections is something you should take seriously because it can significantly affect your credit report and hurt your chances of applying for any type of loan down the line. Be sure and take steps to prevent collection actions and resolve any debt in collections as soon as possible.

What to expect if you have debt in collections

If you’ve received a phone call or letter in the mail notifying you that you have debt in collections, it means you’ve likely missed more than one payment. First, the lender’s collection department may reach out to you to remind you of your debt. This happens right after your first 30-day missed payment.

After that, your contact information is usually given to a third-party agency whose job is to continuously remind you of your obligation to pay. Your lender hires debt collectors with one thing in mind: to get you to pay your debt. This third party is called a collection agency.

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Once a collection agency gets a hold of your debt, the original lender will likely no longer be communicating with you as they've officially assigned someone else to do the "dirty work" of rounding up the debt in collection for them.

Falling into debt can happen to anyone at any time. Life is unpredictable and numerous factors can contribute to you suddenly being unable to pay your monthly obligations. Having said that, it’s important to remember that your creditors also have a right to try to collect the money you owe them.

Collections can happen at any point in which your debt is past due. Once the collections department or agency is notified about the delinquent account, there's not much you can do to stop the debt from being listed as being in collections on your credit report.

What happens if you ignore a debt collector?

Ignoring a debt collector is probably one of the worst things you can do. If you’ve defaulted on a debt, you could find yourself owing a hefty amount with added on fees. You may even find yourself in a courtroom. The debt won’t suddenly go away. (Unless it’s charged-off, which is a huge ding to your credit. A charged-off debt means, after an extended collection period, the debt collector has given up).

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Many ignore debt collector messages and view them as nonstop annoying calls and letters. But the longer you ignore their calls, the longer you’re harming your credit. Remember, these agencies are paid to be persistent. Just because you don’t answer doesn’t’ mean you’ll “win” in the end.

While laws spell out what debt collectors can do, keep in mind they can’t harass you with harmful threats, use obscene language, lie about who they represent or falsely claim you’ll be arrested, according to the Federal Trade Commission.

Should I pay my collections off?

While paying the debt at this point helps, the negative notation that the account had to reach collections before it was paid will remain on your credit report. This can impact your credit score for five years. However, paying off your debt in collections will help improve your credit score in the long run, and it’s better to have a collection account marked “paid” rather than one that is still open or charged-off.

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An account in collections can significantly bring your score down and make you ineligible for lower interest rate loans in the future. But a paid-off collection means lenders will view you as a less risky borrower. It will also lower your overall debt. If you’re short on funds and your debt is mounting, you may want to consider using other sources, such as your 401(k) plan to pay off debt before it goes into collections.

To improve your credit score after a collection makes its way to your credit report, contact the debt collector to see if they’ll negotiate with you. Sometimes if you offer to pay off the debt, they will agree to remove the collection account from your report.

Improve your credit score going forward by making sure your bills are paid on time, or at least within 30 days of their due date. Check your credit report regularly, for free, so you can stay ahead of any potential collection activity.

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Sometimes credit agencies get it wrong and you may have an inaccurate collection account on your credit report. It may have been paid or the account may not even belong to you. Either way, the Federal Trade Commission suggests disputing the debt in writing. Prepare to send the collector a letter disputing it and be as specific as possible about why you think the debt is wrong. Remember: You have the right to dispute any debt that you deem as erroneous.

To avoid debt collection, be sure and pay all your creditors as agreed. If you can’t make the monthly payment, communication is key. Many creditors will try to work with you and you may be allowed to skip a payment or come up with a smaller payment amount.