Many Americans are living close to the edge of their budgets in the COVID-19 era. If you’re in danger of falling behind on debt payments, let’s talk about collections before you get there, how you end up there and what you can do about it.
A natural reaction is to “rob Peter to pay Paul” in order to make ends meet in a given month, hoping things will get better soon. All too often they do not.
For my readers living close to the edge of their budgets, it is easy to inadvertently find themselves in the unfamiliar and seemingly unforgiving world of collections. So, if you are in danger of running out of money before you run out of month, let’s talk about collections before you get there, how you end up there and what you can do about it.
How do accounts end up in collections?
Generally, when an account passes a delinquency milestone, it is sent from customer service to a collections area. The account may be sent to an internal department or it may be sent to a third-party collection agency or, in some cases, the account may be sold outright to an agency at a steep discount.
How long you have owed the money is the main factor in where the account is sent. As debts age, they are less likely to be paid.
- Typically, for a 90-day old debt, there is a high likelihood of repayment and lenders want to keep the customer, so customer service handles the case. Between 90 and 180 days, the account may be worked by an internal collections department, still with the idea of retaining you as a client.
- Sometime around 180 days past due, the account is considered unlikely to be collectible and may be sent to an outside specialist collection agency that cares only about getting paid. At this point, your value as a customer is very low.
As I said earlier, with finances stretched to the limit by high unemployment and furloughs it is easy to have bills not being paid on time, as agreed. Sometimes things happen that are out of your control. So, while most creditors will work with you for at least a period of time, sometimes those options run out.
When they do, your accounts can end up in collections. In fact, federal law states that accounts can be turned over to collections as soon as they become 31 days past due, although that is not usually the case. Then what?
See related: What happens when you miss a credit card payment?
3 ways to pay off a debt in collection
There are three main ways to pay off a debt that is in collection: pay it in full, offer a lump sum settlement amount of less than the full balance or set up a payment plan to pay the debt off in full over time.
You will notice that “not paying the bill” is not considered an option. While I won’t cover that aspect of debt nonpayment here, be assured that there is a whole system of legal options (increasingly unpleasant and costly) available to the creditor.
1. Paying in full
If you have the funds available and can pay off the debt in full in one payment, option No. 1 is probably the best solution. The problem here is coming up with a large lump sum all at once.
If you have items in collection, it probably signals other problems that would preclude you from being able to do this. However, you can sell stuff, refinance elsewhere for better or longer terms that may be more affordable, hit the lottery or come into a huge inheritance. (I wouldn’t count on either of those last two things happening.)
2. Debt settlement
Second, you could offer a settlement amount that is less than the full amount you owe. Again, this one works best if you have a lump sum to offer. Same problem as No. 1, although a smaller payment number is involved. In addition, the collector has to agree to your offer.
3. Payment plan
As for option three, you can try to work with the collector to come up with a plan that will pay off the debt in full over a specified time period. The key here is coming up with a plan that you both can live with and agree to. Increasingly due to the current pandemic, creditors are willing to work with customers who reach out for payment assistance.
Credit card issuers typically offer hardship programs to struggling customers. In addition, the network of nonprofit Consumer Credit Counseling Services at NFCC.org can structure repayment plans acceptable to most lenders that will also fit your budget. And they do it for free!
See related: 3 steps for negotiating credit card debt
What to do before you pay
Before taking any of these actions, I advise you to get your ducks in a row. Know what you can afford before you decide on any of the options. Here again, the credit counseling option is good because they can help you figure out a workable spending and repayment plan based on your current situation. Did I mention that it’s free?
No matter which way you decide to go, be sure to get all terms down in writing. If you can come to an agreement with a less-than-full-balance option, this will include their acceptance and agreement to the final amount, as well as how they will be reporting the account to the bureaus.
It never hurts to ask for the account to be marked “paid as agreed” in return for a fat payment. If you choose a pay-over-time option, again, have the terms spelled out so that you both know what is expected of you.
I would caution you here to be sure that you can live with the terms over the period of time you have agreed to. If something else unforeseen happens and you can’t abide by the terms (for instance, if you miss a payment) you may very well forfeit your agreement and have to start all over again. This will result in yet another derogatory mark on your credit report and ultimately your credit score.
However, under the terms of the CARES Act, creditors that allow you debt forbearance before you become delinquent won’t report you as late to the credit bureaus, keeping your score intact.
See related: Will it hurt my credit if I ask my issuer for help?
Why pay off a debt in collection?
You may be asking why would you even have to pay a bill in collection when it’s not your fault. After all, the damage to your credit report and score is done and paying off the debt won’t erase all of those negative marks. Paid medical debts in collection are ignored under some credit scoring models (but not FICO 8).
I will tell you that delinquencies will stay on your credit report for seven years, but a notation of “paid” will help you in the eyes of future lenders and you will avoid possible legal action. This is because debts in collection that remain unpaid will stay there and never go away on their own, even though they may drop off your credit report.
Seven years is a long time, but the real impact to your score itself will diminish long before it passes. But you have to keep your credit nose clean. This includes paying all of your bills as agreed, on time, each and every time or communicating with creditors early and candidly when you cannot.
Remember to keep track of your score!