Debt collection: What to know and how to pay off your dues

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Debt collection: What to know and how to pay off your dues
Debt collection: What to know and how to pay off your dues

Have you got a call from a debt collector? Don’t worry. There’s nothing to panic about. Know about the debt collection process and how you can repay your outstanding dues.

What is meant by debt collection process?

A debt collection process usually has 3 phases which are discussed below:

Internal collection efforts

When you don’t make your payments for 6 months, the internal collectors of your creditor contact you. They are referred to as first-party agencies.

In this phase, you’ll deal directly with the creditor and no middleman is involved in the process.

It is relatively easier to deal with lenders and creditors instead of debt collectors.

Debts assigned to a collector

If your lender/creditor is not able to collect the outstanding amount, they often assign the debt to a third-party agency, with whom you can negotiate to settle the debt.

The creditor still owns the debt.

The creditor gives a commission to the collector depending on what they can recover from you, the debtor. The commission can also be a percentage of the recovered amount.

Debt sold to a collector

In the final or third phase, the creditor sells the debt to a collection agency or a debt buyer. It may come to your mind how much does a collection agency pay for a debt?

It is usually pennies on the dollar, which often means a few cents for a dollar. Now, whatever the debt collector can recover, it’s their profit.

When does a debt collector call you?

You may get a call from a debt collector when you become delinquent on your debt significantly. That is, you are about 90 days past due on your payments. And, when you’re delinquent for 120 - 180 days, there’s every possibility that a debt collector, a thrift-party debt collector will call you.

What can happen if you don’t pay the debt?

Every state has its SOL (Statute of Limitations) period of each debt. Within this period, a debt collector or creditor can sue you in the court and you can get summons to appear in the court. You may choose to defend yourself if you wish to.

If a creditor or debt collector wins a judgment against you, then a part of your paycheck can be garnished monthly to pay back your creditors.

Whether to pay debt collector or original creditor - How to decide

At first, you have to know whether the creditor still owns the debt or it has been sold to a debt buyer. The question is how to find out what creditors you owe? Check credit reports to be sure about the original creditor. Sometimes, mistakes happen in credit reports too. Lenders or creditors may make mistakes and report wrong information to the credit bureaus.If you find this in a credit report, dispute the mistake with the creditor and the credit bureau. Also, notify all the 3 major credit bureaus to rectify the error.

As already discussed, in the first and second phases, you can negotiate with the creditor.

When the debt is assigned to the internal collection department, that is in the first phase, you can negotiate an alternative payment plan and the negotiation can go quite a bit in your favor.

In the second phase, when the debt is assigned to a collector, you can still negotiate for settlement with the creditor, which will be easier for you.

The creditor can be more flexible in working out with the options. They may also view you as an old and a future customer with whom they can work with

However, if your debt is in the third phase, that is, the debt collector owns the debt, then it won’t be much help to negotiate with the creditor and pay back.

You can still call the original creditor and ask whether or not you can discuss with them directly. In most cases, the creditor will ask you to work with the debt collector.

Moreover, even if you pay a lump sum amount to the original creditor, the new owner or the collector may refuse to accept that.

So, it’s better to explain your situation and negotiate with the debt collector directly.

A debt once sold by a creditor usually can’t be taken back. However, if you negotiate with the collector for a better payment plan, make 2-3 payments according to the plan, the creditor may offer a new credit line. It will help you rebuild your credit.

How to start paying off debt - 4 Ways to do so

When your account is in collections, first of all, ask the collection agency (CA) to validate the debt.

Once it’s validated by the CA, check out whether or not the SOL (Statute of Limitations) has passed.

Before you start negotiating and making the payment on a debt whose SOL has passed, know that it will start all over again if you make any payment, however small it is.

Check out the 4 best ways to pay debt collectors:

1 Repay the entire outstanding amount

The best way to pay a debt collector is to repay the outstanding amount through one lump sum payment.

However, you’ll only be able to do so if your financial situation permits you.

2Make an alternative payment plan

First, check out how much you can pay every month and on its basis, propose the plan to the debt collector.

Coming to an agreement with the collector will help you repay the debt in a much manageable way.

3Negotiate with a debt collector for settlement

You can give the offer to settle the debt with a reduced lump sum payment. In most cases, they won’t agree with the first offer, but after a few negotiations, both of you can come to an agreement.

Usually, you need to settle the debts through one lump sum payment or through a few installment payments. However, by choosing the installment payments, you may start the SOL once again and also restart the time period of the negative item staying in your credit reports.

How much will creditors settle for? It will depend on your negotiating skills.

So, it is better if you know how to negotiate with a debt collector properly before you negotiate debt settlement on your own.

However, it has happened in a few cases that the debt collector has sold the remaining debt amount to another collector.

Moreover, if the collection agency forgives an amount more than $600, then you’ll have to pay tax since the IRS (Internal Revenue Service) considers it to be your income, and so it’s a taxable amount.
Whatever option you choose amongst these, make sure you have a written agreement before you make any payment.

4 Enroll in a settlement program

This can be your best way to pay a debt collector if you want professional help to solve your debt woes.

You can pay collections online just by making a single payment to the settlement company every month.

You have to enroll in a settlement program and pay an agreed upon monthly amount to the settlement company, who on your behalf, will negotiate with the debt collector and offer complete professional guidance.

Does paying off collections improve credit score?

You may think it should be. But, if you pay off a debt, will your credit score go up instantly?

Well, you know that defaulting on a debt payment reduces your credit score, so the opposite should also happen, that is, your score should go up after paying it off.

But, practically, that doesn’t happen.

Paying off a debt in collections doesn’t help your score to improve. However, it can influence a future lender to label you as a trustworthy person to approve your loan request.

What to do if debt collectors violate FDCPA

The debt collectors have to follow the rules of FDCPA. However, if you find a CA violating FDCPA, you can file a lawsuit and will have to prove it.

If you’re successful, you can get about $1,000 along with the attorney fees. You can get possibly more if you’ve suffered any harm due to the violation of FDCPA.

If you want to deal with it all by yourself, you can file the lawsuit in the small claims court, too. The process is faster but you may recover a relatively smaller amount.

If you have any questions, you can seek help online and get advice from experienced persons. Solve your debt problems and lead a good financial life!

Last Updated on: Mon, 27 Apr 2020

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