What should you do if your unpaid debt is in collections?

Letting your unpaid bills go in collections could prove to be troublesome. You may find yourself in court and with damaged credit history for years to come. To avoid that, here are a few steps to take if your debt goes into collections. 

APPhoto/Richard Drew/File
A Visa credit card is held by a consumer at a Superdry store in New York. More than 35 percent of Americans have debts and unpaid bills that have been reported to collection agencies, according to a study released in July, 2014, by the Urban Institute.

Let’s face it: Sometimes a bill goes unpaid. Maybe you didn’t have enough money for a utility bill and decided to face the consequences later, or perhaps a medical bill got lost in a pile of mail. It could be that you moved and never received the bill.

Regardless of why your unpaid bill went into collections, it’s important to deal with your collection notice now. If you don’t, you could find yourself in court and with damaged credit for years to come. Read on to learn what to do if your unpaid debt goes into collections.

Why your debt went into collections

When you haven’t paid an unsecured debt, there is nothing the creditor can take away from you if you don’t pay, so they send your balance to a collections agency to obtain payment. “The hope is that we will need to use our credit one day and we will want to pay that account off so we can get the loan or service that we are applying for,” says Becky House, education and communications director for credit counseling agencyAmerican Financial Solutions.

House says the most common types of debt that go to collections include medical bills, credit cards and old utility or cell phone bills, but nearly any type of debt can end up in collections.

Will the debt go away?

Some people believe debt will eventually disappear if they don’t pay it. This is, in fact, sometimes the case; each state has its own statute of limitations for debt, and after a certain number of years, you are no longer liable for some forms of debt. But according to House, “Student loans, taxes, and some judicial debts never go away and must be dealt with.” If you don’t pay up, the debt collectors may sue you.

Dealing with your unpaid debt

Once you receive a collection notice, House recommends finding out how old the debt is and how long it’s been in collections. If it’s old debt, check your state laws to see if the statute of limitations has passed.

The collector must prove you owe the money, says Sheri L. Stuart, senior communications specialist and education manager for Springboard Nonprofit Consumer Credit Management, Inc. “Never acknowledge a debt with a collector or agree to any payment until the collection agency ‘validates’ the debt to prove you do indeed have to repay it,” she says. Past billing statements aren’t adequate proof, Stuart says.

If the debt is valid and you can pay it off immediately, that’s the best strategy. “If you can pay a debt that has newly gone into collections, you may be able to avoid damage to your credit report,” House says. “You typically have 30 days before the collection agency reports it to the credit bureaus.”

If you can’t pay it now, don’t ignore the collection notice, or you may be taken to court. To avoid a lawsuit, let the debt collector know you do intend to pay. You could also tell them a lawsuit is pointless because you are “judgment-proof”—which, according to Stuart, “means that you have no income that could be garnished or assets that could be seized even if the court awarded the collector a judgment against you.”

While you can try to negotiate a payment arrangement, House recommends saving to pay off the agency in one lump sum rather than entering an ongoing relationship. Collection agencies can be difficult to work with, House says. And negotiating a settlement with a collection agency, rather than paying your balance in full, is indicated differently on your credit report and can have a more detrimental effect on your credit.

Once you’ve spoken to the collector and agreed upon a course of action, document it. “Make sure any agreement you reach is provided to you in writing and on the collector’s letterhead before making a payment,” Stuart says. She adds that you should ensure the letter contains the name of your original creditor.

It’s important to know that even if you do pay an account in collections, it will remain on your credit report for seven years, though it will be marked as paid. When this is added to your credit report, it will negatively impact your credit, but the effect will lessen over time.

If you have questions or concerns about the debt collection process, a credit counselor certified by the National Foundation for Credit Counseling can help you. You can find a number of NFCC-certified agencies through NerdWallet’s Ask an Advisor platform.

Be cautious with payments

It’s important that you do not give the debt collector permission to access your bank account, either by providing your debit card number or setting up automated debits, Stuart says. “Once the money comes out of your account, it will be difficult or impossible to get back, even if you believe the collector took too much or took it on the wrong date,” she says. She recommends sending payments by check or using your bank’s online bill pay option instead.

If you think the notice is in error

If you believe the collection notice is a mistake, never ignore it, even if it’s not your debt. If you don’t contact the agency immediately, they may file a lawsuit or judgment against you. On the flip side, don’t pay a collection notice that’s not yours just to make it go away. “Any payment of the debt is considered an acknowledgement that you are responsible,” Stuart says. “Even if you pay, that will not erase a negative entry on your credit report.”

The Fair Debt Collection Practices Act (FDCPA) permits you to request validation of the alleged debt. Within 30 days of receiving notice, send a written dispute or request for verification. “Then the debt collector must either mail you the requested verification information or cease collection efforts altogether,” Stuart says. She recommends sending all written correspondence by certified mail with a return receipt requested and saving copies of all correspondence.

After your dispute is filed, the agency must stop collection efforts and investigate to validate the debt. During this time, they can’t put the issue on your credit report. If they find the debt valid, they will mail you documents that verify the bill. If it’s not? “When you send the collector proof that the debt is not yours or has been satisfied, ask for written confirmation that the collector is not holding you accountable for the debt,” Stuart says. “Keep your records indefinitely, especially any correspondence that states you are not responsible for the debt.”

Know that you have rights

There are legal restrictions that prevent debt collectors from engaging in abusive, deceptive and unfair practices. Familiarize yourself with the FDCPA so you know what they aren’t allowed to do. This includes calling you at unreasonable times, threatening you with arrest or using obscenities. Some states have even more protections for consumers, so find your state’s laws online or contact your attorney general’s office to learn your rights.

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