How to Handle Debt in Collections: Expert Advice & Resources

If you’ve never had a debt go into debt collection, it can be a scary moment when it does. You’ve heard the warnings of how you’ll get a black mark on your credit report, you’ll get calls from a bill collector and your credit score will drop. While all that’s true, there are several actions you can take to get rid of that debt.

Debt collection is a term used to describe a company with one mission: to convince people to pay back money that they owe a creditor.

Debt collection companies tend to pursue people who owe debts by sending letters and making phone calls, and they are hired by companies trying to collect money owed to them. Many companies don't have the personnel or patience to chase down payments indefinitely. Generally, they'll try to collect money owed for a few months and then hand the bill over to a debt collection company.

Once a debt becomes late, the company you owe the debt to will start trying to contact you to persuade you to make a payment. If you don't respond or pay during a certain amount of time, the company will turn your account into a collections account. A debt can go into collections as early as 31 days.

Even if your account becomes a collections account after 30 days, it may still stay with the company for another month or two. After that, it may be turned over to a collection company at the three-month mark. Some businesses will even wait for five or even six months before the debt goes to collection. You probably aren't going to get much more time than that, however.

Any bill can go to a collection agency. Your best friend could hire a debt collector for the money you owe, unlikely as that is. If the money you owe does end up with a debt collector, the most likely suspects will be past due bills from credit cards, student loan debts and medical debts.

The most common types of consumer debt include the following.

Collection agencies are companies that collect debts for companies that are owed money. How the collection agency gets paid can differ by the company and state laws. In some cases, if an agency collects money from a debtor, it will take 25% to 50% of the amount collected as a commission. Some debt collection companies purchase delinquent accounts from the original creditors for pennies on the dollar of the amount owed and keep 100% of whatever they collect.

When a debt goes to collections, your credit score will go down, but there are ways to improve your credit if it does. The collection account will stay on your credit report for up to seven years — even if you quickly pay it back. Lenders will be able to look at your credit report and see that your debt went to collections. The good news is that if it was only one or two debts and you paid them off and otherwise have a clean record, lenders may still extend credit to you.

Collection agencies must wait 31 days before reporting any debt. If you can pay a delinquent bill before that 31st day, you can likely avoid damage to your credit score and credit report. You have even more time with medical debt. When a collection agency has a medical debt, they have to wait 180 days before reporting it to credit bureaus.

If your debt goes to collections, your credit score will take a hit. How much is hard to say. It depends on how healthy your credit score was to begin with. You could see a pretty serious drop of, say, 40 points if you have an excellent credit score, and maybe only a four-point drop if this is just another debt in collections and your credit score has been dwelling in the basement for years.

Unfortunately, as is often the case with a credit score, there's no definitive answer. Your credit score may gain some points, or it may not budge at all. There are numerous credit scores that lenders use, and while some newer algorithms will take into account that you paid off a debt, others won't. Generally, you are more likely to get a better loan if lenders see that you've paid off debts in collections.

As a general rule, don’t ignore debt collectors. While it’s OK to take a few days to gather your thoughts and documentation before talking to them, ignoring them entirely only makes your debt problem worse. Working with debt collectors is a process, and you’ll want to take the time to formulate a plan.

Paying off a debt in collections may not sound hard, and for the most part, it isn't if you have the money. But you'll want to take the following steps to ensure everything goes smoothly.

When you talk to a debt collector, you'll find that the best of them are going to be sympathetic to your financial plight. In fact, you're probably talking to somebody who isn't exactly rich themselves. According to the job website Glassdoor.com, the average annual salary of a debt collector is about $31,000 a year.

It pays to be polite, keep your nerves steady and offer to pay what's possible without wrecking your budget or stretching your finances too thin.

Scammers prey on the vulnerable. If you have several debts, you may be vulnerable to thinking a con artist is a real debt collection agency. Red flags include calls after 9 p.m., being asked to pay a debt you don't recognize and a debt collector requesting payment with a money transfer or prepaid debit card.

If you suspect a scam, ask for the debt collection company's name and do some research online. If you smell a rat, you're probably dealing with one.

It's a widespread practice for debt collectors to sell debts that they can't pay to other debt collectors. If one day you're receiving letters from a new debt collection company you don't recognize, but the debt is one that you recognize, such as an old student debt you never paid off, that's likely what has happened.

If your debt is sold to another company, it’s still your debt, and generally, whatever you’ve been told, you still are obligated to pay it.

Sometimes, a debt collector will come after somebody for money they never spent. If your ex-spouse, for instance, racked up credit card debt during your marriage, it may be something that you are legally both on the hook for. However, depending on your state's laws, if your name wasn't on the credit card, you're not responsible for the debt.

If this is, say, a sibling's debt, it may be a case where you were put down as a reference if the money wasn't paid. If the debt isn't yours, it's best to dispute it by asking for proof of the debt and checking federal and state laws regarding common debts.

Sometimes a debt collector will come after somebody for money they never spent. If your ex-spouse, for instance, racked up credit card debt during your marriage, it may be something that you are legally both on the hook for.

If this is, say, a sibling’s debt, this may simply be a case where you were put down as a reference in case the money wasn’t paid. If the debt isn’t yours, it’s probably best to dispute it.

Here's what not to do: Nothing. If you don’t go to court, the judge will find you at fault. If that happens, anything can happen. You could see your wages garnished, a lien placed against your property and your bank account frozen.

You may want to contact a lawyer for advice, especially if you plan on going to court. You will probably find that if you pick up the phone and call the debt collector, you can set up a monthly payment plan or negotiate a settlement. If the debt truly is not yours, it's best to contact an attorney and go from there.

If you're drowning in debt, fighting debt collectors and, in general, feel overwhelmed, there is a lot of help out there. Some of the many resources you may want to turn to include:

• Consumer Financial Protection Bureau: The organization’s name is its mission — to protect consumers from unfair practices by banks, lenders and financial companies.
• Federal Trade Commission: The FTC is a government agency that works to protect consumers from unfair financial practices, among other things. It has a lot of useful information, such as advice on coping with debt.
• MyCreditUnion.gov: This federal website about credit unions has a lot of information and advice on dealing with debt collectors.
• National Foundation for Credit Counseling: If you don’t want to deal with debt collectors and want help getting out of debt, there are NFCC chapters around the country. You could work with them to help you get out of debt. The FTC has information about choosing a credit counselor who may be helpful.
• State Attorney General Websites: These sites are often full of information about debt collections and will give you solid advice on how to spot debt collection scams. Here are a few state attorney general websites: Ohio, Texas and Minnesota. You may want to check to see if there is a website in your state.