Should You Pay Off Debt That’s In Collections?

by Alexa Mason · 28 comments

A friend of mine lost her longtime job back when one of the biggest companies in the state closed during the financial crisis. 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. Soon after her job loss, she stopped paying on her two credit cards and cell phone bill.

The result? Three accounts amounting to the tune of $3,500 are now in collections.

She finally found a new job and started to straighten out her finances a few years later. But by then, her debt was already sent into collections. She wanted to know what the best way to deal with the obligation was and asked for my advice, so 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.

Yes you can

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 not 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 because the court could order to have your wages garnished, assets seized, and money taken straight out of your bank account.

Plus, you do owe this company money at the end of the day. 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?

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  • Ralph M says:

    I know a LOT about Collections because I used to work at Debt Collection Agencies several years ago. These days as a Financial Advisor I use my expertise to help people to totally avoid collections as well as how to stop those harassing phone calls. One thing that this article did NOT get right was the 7-year statute of limitations. It is not based on the time when the debt first became a “charge off” and went into collections. But is really based on last payment activity. Let’s say you have an unpaid debt in collections that is already 6 years old. If you never send in a payment ever again, all three of the Credit Reporting Bureaus must delete it from your file as soon as it reaches 7 years of age. Most will not do so unless you point it out and start making a fuss and threaten to file a consumer complaint. But let’s say that for some reason you do decide to make repayments and do so on an installment plan. That 7-year window will start over each and every time a payment gets applied. It is already 6 years old. Let’s say it took an additional 2 years to finally pay it off. This will mean 6+2+7 = 16 years that this bad debt will be on your credit report. But had you held back and NEVER paid anything, that already 6-year old debt would have to be deleted as soon as it became 7 years old; regardless as to if it was unpaid or not. Continuing to report it otherwise becomes a violation of a federal law known as the Fair Credit Reporting Act. You have to use your own Judgement to determine if you really want to use “good money” just to repay a “bad debt”.

  • Robb says:

    Don’t let the bill collectors get to you. I had a relative who owed everybody for everything. I learned from him to have ALL mail (especially anything financial) go to a Post Office Box. This way if the collection agency, court, government entity or whoever else wants to send you threatening mail “nasty-grams” they all go to the box. Then you can decide to only retrieve mail whenever you want to deal with it instead of psychologically being harassed every single day. Then he got a magic jack internet phone number and changed his contact info on everything to that number. Then the collection agencies could call him from 8 a.m. to 9 p.m. seven days a week – and they did. It didn’t affect his mental status one bit since he wasn’t personally being bothered.

    I pay my bills – however, I decided to have all financial mail go to a P.O. Box. Everyone who isn’t a personal friend I’d get up in the middle of the night to go help when in a bind – gets the magic jack internet phone number. Only my closest friends have my cell number. I can see when I’ve been telemarketed, and it doesn’t use up the precious minutes on my prepaid cell.

    Thanks brother for my learning from your mistakes!

  • Alex says:

    Thanks for highlighting these truths. Debt is certainly a scary thing, but the key is not to panic and to try an haggle what you owe down to a more acceptable level.

    • David @ says:

      Speaking of haggling, I wonder if people can start negotiating BEFORE the debt is sent to collections. Does anyone have success stories of being able to knock down the amount owed without the credit report getting dinged?

      • Annette says:

        yes! I have found that the companies WILL allow for negotiation rather than pay another company a portion of the amount you get back! They’d rather work with us and close the book.

        Question; Isn’t it Double Jeapardy if a Company states that the debt has been written off and then they collect the money anyways?
        ie: They get the tax break of the “loss” or debt and then accept money from us?

        Great Blog… I’m so stressed out about the loan I took out for my son. I know! I should have done more to save. 2 kids, their father owes me $65,000 in back child support. New husband not willing to help because he wants to retire. I have run our home to care for the family and they love it! however we must eat! And we risk loosing our ASSets we have worked so hard to acquire!
        Why can’t we get a bail out now and again, like WallStreet!?

  • Aldo says:

    Oh man this brings back memories. Since I was an idiot when it came to my finances, I let a couple of accounts go into collections. Ruined my credit for a long time. But when I was ready to pay I just called them and settled for as little as possible. There were a lot of back and forth but at the end I ended up paying less than what I owed by negotiating. That was over 10 years ago so finally I have the derogatory accounts off my record but it took a looong time. The longer you wait to pay off those accounts, the longer it will stay on your record. Better do it as soon as possible and you’ll see that soon enough your credit rating will be back in no time.

    • David @ says:

      The great thing about our country is that it let’s you start over. 7 years for the records to stay on your credit file is a long time but the good thing is that it’s not permanent!

      Negotiate hard, pay the debt off enthusiastically and move on!

  • S Arun says:

    Having bad debt is not a good idea. It is better to pay off the debt and should finish dealing with collection agencies. I heard they are so annoying. I borrow money to invest in stocks, but I always have a backup plan to pay the borrowed money in any time.

    • David @ says:

      What type of borrowing do you do to invest in stocks? The strategy must be working well lately, but be careful if the collateral you are using to borrow is the stocks themselves (aka invest with margin) because valuations can quickly turn against you and wipe you out.

  • David @ says:

    One of my former coworker owed a ton of debt a few years back. It got so bad the collection agencies started calling the accountant at the office – another reason why you shouldn’t ignore the calls and should deal with the problem ASAP.

    I don’t know how he managed, but he ended up moving overseas. I have a feeling his family helped out though because he somehow kept his house, which I heard he’s renting out.

  • Alex says:

    People should definitely pay off their debts that are in collections. Most collection agencies are willing to negotiate the final payoff amount.

    • David @ says:

      I wonder if there are people who game the system by borrowing and then intentionally not paying the balance, only to try settling for a smaller amount later. You hear stories about businesses making these moves in bankruptcy, but I wonder if consumers could do the same?

      • RustyGee says:

        That is a good question that you bring up. The issues are how many loans can you make before your credit score is run into the ground and it takes years before the initial loan is made before the collection agency buys the loan to start hounding you to make payment. I personally would lose track of which loan I wanted to not pay on so I could let it go to collections.

        • David @ says:

          I would think people who attempt this would just stop paying on all the loans (maybe except their mortgages). I mean, if you are going to default, then why pick and choose since your credit score is trashed anyway?

  • RustyGee says:

    You are so right on many of the topics you researched about. I just recently paid off the daughter’s school loan that I was the co-signer which I’ll never do that again. I did manage to only pay 50% of the original loan and the collections company still made money. There was no negotiation on the amount and I was happy to get away with paying only half. The loan was “charged off” on my credit report and I found that out when I applied for a credit card and was rejected. One thing to keep in mind is the moral obligation to repay the loan which is the big reason I paid the collection agency. Granted I did not repay the full amount of the loan because she stopped paying it and they then ame after me to pay it.

    • Alexa says:

      I agree with you Rusty. Other than just being hounded by collectors you have to think about moral obligations, too.

    • David @ says:

      Co-signing a loan is always an iffy proposition but good for you to pay it off due to feeling morally obligated.

      At the end of the day though, she is your daughter, AND you only had to pay half the amount owed on a school loan so there’s a tiny win there IMO.

      • RustyGee says:

        When the offer of paying the collection agency 50% of the unpaid balance, that helped seal the deal to stop the calls. It just hurt the wallet to pay it off. It is money that she will not inherit in a few more years.

        • David @ says:

          That’s true. So really, your daughter will get that sum either way and it’s really better for her to feel a bit of that generosity via you paying the loan off for her versus her getting a chunk as inheritance.

  • The Wall says:

    I know someone who was being hounded by collection agencies. The man really just didn’t have the money to pay them. Medical debts are often like this. In order to manage these companies on his terms, he identified their phone number and gave them a number specific ringer. This gave him the opportunity to pick up the phone when he wanted and not just anytime they called.

    • Alexa says:

      That’s a pretty clever idea!

    • David @ says:

      I hear collection agencies are getting better at fighting through technology by blocking their caller ID and/or using different numbers to call you. I remember reading how some of what they do are illegal though, so it’s best to learn your rights if you are in the unfortunate position of being a target of collection agencies.

  • Valerie says:

    Great post! Debt can be so confusing when you are questioning whether you should try to pay it off or perhaps declare bankruptcy. It’s always a good idea to retain a lawyer that specializes in debt management and bankruptcy because a lawyer can help you determine what actions you should take. Thanks for sharing this!

  • Chris G. says:

    Negotiate negotiate negotiate. Collections agencies conduct cost benefit analyses on recovering money. A little now may actually be more than a lot later after the time and expense spent getting the whole amount owed. Be confident and pay that sucker off. Also, negotiate a payment plan that wirks. They are getting 0 dollars from you currently. Even ten dollars ia month is an improvement.

    • Alexa says:

      There really is plenty of room to negotiate in most cases. I actually did this for my brother a couple years back. When he turned eighteen he had taken out a credit card and never paid it. When he was ready to straighten out his finances I made the call for him and negotiated a much lower payment.

    • David @ says:

      It’s always a good idea to start negotiating as early as possible, because it will lower the amount owed on the debt you eventually have to pay. You do owe them money, so ignoring the calls will only get you into further trouble.

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