An Intro Guide to Debt CollectionOne of the scariest things about owing debt is the fear of it going into collections. Debt collectors have a bad reputation and tend to inspire worries of insecurity and loss in a lot of people. However, dealing with debt collection isn’t uncommon, and it isn’t the end of the world. The Consumer Financial Protection Bureau estimates that, after the financial crisis of the 2000s, 30 million Americans had one or more debts in collections. By understanding how debt collectors work and knowing your options for handling them, you can make it through the collections process and take control of your finances again.

How your debt goes into collections

A debt goes into collections when a creditor believes you (the borrower) will not pay back the money you owe to it, whether that’s because it can’t get in contact with you, you can’t make your payments or both parties can’t come to a settlement agreement. A creditor will get a debt collection agency involved generally three to six months after your payment was initially due, and it will also put a collection notice on your credit reports, which hurts your credit scores. Debt can go from the creditor to the collection agency in one of two ways. The agency can have the debt assigned to it, which means the creditor still owns the debt and the agency is just collecting it on its behalf while following its instructions, or the agency can purchase the debt from the creditor and collect payment however it wishes.

How debt collection agencies operate

When a collection agency gets involved, a debt collector will try to establish contact with you as soon as it can, usually by phone or letter. If it can’t find you, it might try to call your family, friends and neighbors to get your contact information, though legally collection agents cannot discuss your debt with anyone except for you, your spouse or your attorney. Once it gets an answer from you, the agency must send you a written validation notice detailing how much money you owe and naming the original creditor of your debt. After the validation notice, the collection agency will likely try to contact you repeatedly, calling several times a day and sending letters every few days that pressure you to pay as soon as possible. These calls may be recorded, so be careful what you say when you’re talking to a debt collector on the phone. Eventually, if you put the collection agency off for long enough, it may sue you to get a court order for you to pay what you owe. It’s important to note that you can also make a payment plan with the agency, and doing so may impact how often it contacts you. Just make sure the debt is yours — and not zombie debt — before you agree to any payment plan. We explain how to verify the legitimacy of the debt below.

Your defenses against debt collectors

This is something we’ve covered before, but it’s important to note again because many consumers do not realize they have some options when they deal with a debt collection agency.

FDCPA Rights: Your most important defense against debt collectors is to know the rights afforded to you by the Fair Debt Collection Practices Act, or FDCPA. Under the FDCPA, it’s illegal for debt collectors to harass you, including calling you multiple times in a row, calling you before 8 a.m. or after 9 p.m. local standard time or calling you at work if you say it is not allowed to. If you send the debt collector a written request to stop contacting you completely, it has to comply; however, if you still owe a debt to the collector, this will increase the chance that it will resort to a lawsuit to get you to pay because it has no other way to get your attention. Debt collectors also cannot threaten to take any action against you unless they can legally follow through with that action and truly intend to do so, and they cannot deceive you or pretend to be someone else, such as a government official.

Be aware that debt collectors do not always respect the Fair Debt Collection Practices Act, and in 2015 the Consumer Financial Protection Bureau took action against two of the largest debt collection agencies for threatening and deceiving thousands of people. When possible, communicate with the collection agency via letters using certified mail, and make copies of each letter you send so you have a record of communication. If you are required to talk with a debt collector on the phone, make sure you get the name of the person you spoke with and take notes on what they said, how long the conversation was, the date/time of the conversation, etc. Even once you’re finished paying your debt off, it may be a good idea to monitor your credit reports to see if the collection agency truly marked the debt as paid. If you believe a debt collector has violated your rights, you can contact your state Attorney General’s office for help, and report the collection agency to the Consumer Financial Protection Bureau.

Debt Verification: Another important right you have is the right to ask the debt collection agency to verify the debt. After you receive the validation notice from a debt collector, you have 30 days to send a written request for verification of the debt. Once the collection agency receives that verification request, it has to pause the collection until it sends you proof of the debt, such as a bill. Until the debt collector verifies your debt, there isn’t a good reason to make any payments, as debt collectors sometimes try to collect debts that people do not owe, whether that’s due to the collectors not possessing accurate information on the debt, them trying to collect a debt that has passed your state’s statute of limitations or them intentionally trying to scam you. Even if you know the debt is legitimate, verification requests are still useful for buying time to plan a course of action. If more than 30 days have passed since you received the validation notice, though, the agency can legally assume the debt is valid. You can still send a debt verification letter, but the collection agency doesn’t have to pause collections while it verifies your debt.

Negotiation: Once a debt collection agency has contacted you and you have determined the debt it is trying to collect is legitimate, you may think that you have to pay the entire bill at once, but many debt collectors are willing to negotiate with you. Try to agree on a payment plan with the debt collector that you can realistically meet. Even if the plan would take several years to completely pay off the debt, some debt collectors are fine with that if it means you can make all of your payments.

Alternatively, if you truly cannot pay the entire debt, you can try to negotiate a settlement for less than the total amount you owe. Be prepared to explain why you cannot pay the debt in full and show documentation to prove your statements are true, and hopefully you can settle for 30% to 40% of your total debt. It’s important to note that any debt the collection agency forgives is money you then have to pay taxes on. For example, if you owe $5,000 to a collection agency, but you settle with it for $2,000, you have to pay taxes on the $3,000 it forgave. Additionally, settling your debt will not boost your credit score as much as paying the debt back in full, and it may be worth including credit reporting terms (e.g., how the debt will be noted on your credit reports) in your settlement agreement. If you choose to settle, you may want to use some of the money you save to hire a credit repair service to help mitigate the damage the debt did to your credit score.

Debt Consolidation: If you owe debt across multiple sources, or if the debt collector is unwilling to negotiate, it might make sense to consolidate your debt with a balance transfer credit card. Consolidating can help you restructure your debt with more favorable terms and stop the collection agency from constantly contacting you. It’s also a way to keep your credit scores from sinking further due to unpaid debt, and if you pay your loan or credit card payments on time, it can actually help your credit scores. When you’re considering consolidation, make sure you choose a consolidation strategy with monthly payments you can manage. If you can’t pay back your new creditor, you’ll start the cycle of debt all over again.

Getting out of debt is difficult, especially if your debt is in collections, but it’s possible if you practice good financial habits and make the most of your money. To learn more about managing your funds, follow our personal finance blog.