When one of the biggest companies in the state closed in 2008, a friend of mine lost her longtime job. She received small unemployment checks for nearly a year and a half while she searched for a new one.
With two kids to support, she could barely make ends meet. She stopped paying on her two credit cards and cell phone bill.
The result? Three accounts amounting to the tune of $3,500, which are now in collections.
She found a new job and is starting to straighten out her finances. She recently came to me and asked if I could give her advice on settling her debts. To be sure that I didn’t give her bad information, I went into research mode.
Here’s what I found out about settling debts that are in collections:
What happens to my bad debt?
When you fail to pay one of your debts, your creditor may sell your debt to a collection agency for a fraction of the amount you actually owe.
A collection agency will then take all measures within their legal rights to collect this debt from you. You’ll start to receive letters and phone calls from the collection agency, and you might even receive a court summons.
How do these derogatory accounts affect my credit report?
Once your delinquent account goes to collections, the original account will be reported as “charged off” on your credit report. But, the collection account will still show up on your credit report with the amount of your bad debt. These will remain on your credit report for seven years from the date the original account was charged off.
If there’s a judgment against you, it, too, will show up on your credit report for seven years from the date it was entered by the court. If the judgment goes unpaid, it can show on your credit report up to the statute of limitations, which ranges anywhere from 10-20 years.
Will settling my debt improve my credit score?
Settling your debt will likely have no effect on your credit score. The truth is: bad debt on your credit report is no good — whether it’s settled or not.
That being said, some lenders may be more accepting if they see that you’ve settled your debts.
If you do decide to settle your debt, it will be reported on your credit report, and the derogatory accounts will be removed seven years after the initial account was first charged off.
Why should I settle if it won’t help my credit score?
If you fail to settle your debt, you may receive a judgment against you and be taken to court. It’s best to try and settle before this happens, since afterwards, you could have your wages garnished, assets seized, and money taken straight out of your bank account.
Not to mention that you do owe this company money. If you don’t pay, they’re the one who suffers the loss.
Can I settle debts for less than I originally owed?
Yes, you can. You can also settle debts on your own; you don’t need to hire a company to do this for you. It’s important, though, that you take your emotions out of it. Collectors can be very aggressive. And don’t forget to get a document showing the amount you agreed upon before you pay up.
Do you have any tips for settling debt that has gone to collections?