Debt in Collections: Frequently Asked Questions

A few months ago, I wrote an article about How to Deal with Debt in Collections that resonated with many readers and resulted in a wide range of follow-up questions.

As more and more Americans struggle with credit card debt, medical debt, and an ever-turbulent job market, the share of people unable to pay their bills on time (or at all) continues to rise. In fact, at least one estimate suggests that up to 71 million Americans now face debt in collections. That’s nearly 1 in 5 people.

No matter why you’re in debt, please know that regardless of how “impossible” the situation may seem, there is always a path forward. It will take patience, diligence, and strategic budgeting to get there, but it is possible.

If you are facing debt collectors, you may still have some questions, even after reading my last article. Below are frequently asked questions (and their answers!) about debt once it reaches collections.

How Long Do Collections Stay On Your Credit Report?

In short, accounts that reach collections remain on your credit report for up to 7 years, plus 180 days from the initial delinquency date. 

Seven years plus 180 days can be confusing, so here’s a real-life example:

• January 1, 2021. Let’s say this was the date your account became delinquent. Your creditor wouldn’t charge this off until 180 days later.
• June 30, 2021. This is the date that is exactly 180 days after the original delinquency date (where the “plus 180” comes from). This is also the date when the creditor would charge it off for nonpayment.
• June 30, 2028. On this date, the collections record would be removed from your credit report. Note that this is 7 years later. Though your original nonpayment was on January 1, the account wasn’t added to your credit report until 180 days after that date (June 30), so this is when the account would fall off your credit report. 

How Long Can Debt Collectors Keep Pursuing Me? Is There a Time Limit or A Statute of Limitations?

Each state has a different statute of limitations that determines the time period during which a creditor (or a collection agency) can try to recoup their money. 

The specific answer is dependent on where you live, but for most people, debt collectors can keep attempting to pursue old debt between four and six years after the last payment was made.

Now, here’s where things can get a little tricky: collectors can try to collect debts that are older than four to six years old. In fact, they can even attempt to collect a debt that is 10 years old or older. How? The statute of limitations is typically based on when you go into default, not when the debt was taken out.

So even if the debt originated years ago, the statute of limitations is based on when you made the last payment before default. In other words, if you’ve made a payment on a debt within the last four to six years, chances are that collectors can legally still pursue it.

Once the statute of limitations is over, it still depends on your state as to whether or not collections can contact you. Fortunately, even if they can, you are afforded additional protections. In some states, once the statute of limitations is over, collections cannot attempt to collect — period. It’s done. 

In other states, however, you are only added a layer of protection in that the collectors cannot file a lawsuit against you, but they can still attempt to collect via calls or written requests.

Bankrate has an excellent chart that outlines the statute of limitations for every state.

Will A Debt Settlement Affect My Credit Score?

It is possible to pay an amount lesser than the total debt you owe through a debt settlement. However, most creditors will not accept a debt settlement if they believe that you can pay the full amount. This is typically a last resort for individuals who have had many skipped or late payments — or debt that is in collections.

Still, the potential to settle a debt and stop harassment from debt collectors is alluring to many people.

But this inevitably raises the question: “If I pay off my debt for less than the original amount, will it affect my credit scores?”

Yes, but not in a good way.

Your credit score will show that you settled the debt for less than the full amount. So even if you are able to wipe out your debt, your credit score will still suffer. Why? Debt settlement is still considered a negative thing because the creditor has agreed to accept a loss compared to what was originally owed. By putting this on your credit score, it signals to other creditors that lending to you may be considered “risky.”

So does this mean that you should avoid a debt settlement? Not necessarily. Here are some important considerations to keep in mind:

• Debt settlement is still much better than not paying at all.

  Yes, settling your debt is considered a negative on your credit score, but not paying at all will hurt your score even more. Furthermore, if you want to take out a loan in the future (whether for a house, for higher education, or other major purchases), odds are that you will still be required to settle or pay back the full amount before qualifying for a new loan. 

• Debt settlement isn’t immediate.

  In fact, this is a timely process, as you have to get the creditor to agree to accept less than the original amount owed. Most debt settlement processes take anywhere between two to four years. 

• You may have to pay additional fees and taxes.

  It is illegal for companies to charge you an upfront fee for the cost of settling debt. However, they can charge you a percentage of the total debt settled based on the balance when you enroll in the program. Furthermore, if the debt has been forgiven, it’s important to note that the IRS considers forgiven debt taxable income. For this reason, it’s recommended that most people consult with a tax professional if they are considering settling their debt.

• Current debt is more important to your credit score than old debt.

  It’s not unusual for us to have multiple types of debt. Credit cards, car loans, mortgages, medical debt, and student loan debt result in different debts with different creditors. If you are behind in some debt, but not in others, it’s important to try to stay current on your newer accounts, as these are given more weight on your credit score. In other words, it’s better to stay current on your newest debt and leave one account unpaid, than to have multiple accounts that have late or unpaid payments. 

This is a lot of information to take in, but it’s important to understand the pros and cons of a debt settlement. Again, I want to emphasize that while a debt settlement might sound like a bad thing (and while it does negatively impact your credit score), if you have no other alternative, it’s better to go for a debt settlement than to allow the situation to get worse (such as bankruptcy). 

Once My Debts Are In Collections, Should I Make Payments? Or Not?

Paying off your debts in full is always the best course of action, assuming you have the money and means to pay it off.

However, if a debt collections agency reaches out to you, that doesn’t mean that you should immediately begin paying the bills. You have the legal right to verify that the debt is indeed yours and that the collectors are legitimate. Under the Fair Debt Collection Practices Act, these agencies have 30 days to verify your debt as well as their authority once you make the request.

If the debt is verified as yours, then the best course of action is to make the payments that you can. Remember, ignoring debt collectors will not make the debt go away. After all, if ignoring debt would make it go away, then no one would ever pay what they owed.

Yes, dealing with debt collectors can be intimidating and scary, but it’s important to remember that you still have legal rights as a consumer (I covered those in my previous post, which you can read here).

Additionally, it’s not uncommon for people to think: “If the ding will stay on my credit report for 7 years anyway, why should I make an effort to pay any of it?” 

Not making a payment can result in:

• Lawsuits
• Wage garnishment
• Further damage to your credit report
• The inability to take out loans for larger purchases

What is “Pay for Delete?” Is That a Legitimate Option?

It’s no secret that collections weigh down your credit score, but what if you could have that burden “deleted?

That’s exactly what “pay for delete” aims to accomplish. In short, this is a type of negotiation similar to a debt settlement. This is a situation where the consumer makes an offer to pay the balance off if the creditor or collector agrees to fully “delete” the entry from your credit report.

In some cases, collections agencies will even pro-actively make this offer as an incentive to get people to pay off their debts.

While this may seem like a great deal, in some cases, it’s better to wait the full 7 years for the damage to naturally fall off your credit report.

Economic experts point out that:

• Collections agencies are notorious for making promises they don’t intend to keep
• “Pay for Delete” schemes undermine the purpose of credit underwriting
• The latest credit scoring models (FICO 9 and VantageScore 3.0) ignore paid collections accounts anyways

If you meet with a financial expert and determine that “pay for delete” is right for you, it is recommended to send a physical letter to the collector requesting “pay for delete.” Furthermore, the letter, any follow-up correspondence, and any payments should be sent via certified mail with a return receipt requested. This provides evidence that your letters and payments were both mailed and received, providing you with additional protection.

How Can I Get Back On Track?

No one wants to be in debt. And no one wants to have to deal with harassment from debt collectors. 

Regardless of where you are on your financial journey, it’s always possible to reroute your final destination and make a realistic plan to get there.

I encourage you to Start Here to learn more about my financial philosophy and figure out how you can proactively create a financial plan that you can be proud of.

If you have any other questions, please let us know in the comments below! We’re always looking for ways to provide guidance to the TBM Family!