How to pay off your debt in collections (without falling into a trap)

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Note that the situation for debt has changed in some cases due to the impact of the coronavirus outbreak and relief efforts from the government, lenders and others. Check out our Hero Coronavirus Student Loan Information Center for more news and details.

Whether you’re late in paying debt on student loans, personal loans, or credit cards, you need to know that you’re not alone. The Urban Institute found that an estimated 71 million Americans are debt collectors.

Overdue debts are detrimental to your financial health. Your credit score can be negatively impacted by a report of unpaid debt, making it more difficult to qualify for a loan or other financial product.

However, all of that can be reversed if you learn how to pay off debt through collections, either by partnering with a credit adviser to resume repayment or negotiating new terms. Be careful how you pay off old debts in collections, as the limitation period can affect your strategy choice.

How to pay off debt in collections

If you can afford to pay off your overdue debt all at once, that could be the right option. Of course, that’s not an option at all for most borrowers.

Without access to enough cash to pay off your debt immediately, here are three tips to keep in mind when paying off debt collections:

1. Create a payment plan – or negotiate a settlement

Not all debt collection agencies accept a payment plan, but it’s worth asking if it’s an option for you.

After receiving a message from a debt collection agency, sit down and realistically calculate how much you can afford to pay each month. When you have a payment plan proposal ready, your negotiations with a debt collection agency easier.

The Consumer Financial Protection Bureau recommends not paying more than you can afford, as this can lead to financial problems with other accounts and potentially cause you to add even more debt. A credit counselor or attorney can help you set up one debt management plan, but don’t trust companies that claim they can settle, renegotiate, or change the terms of your debt.

Your debt collection agency may be willing settle your debt for less than you owe, but again, that can take more cash than you have on hand. That makes payment plans a more realistic option for most borrowers.

Once you have entered into a payment plan agreement with a debt collection agency, you must put your agreement in writing before making a payment to ensure that the debt collection agency meets the terms of your deal.

2. Proceed with caution before paying off old debts in collections

If you want to know how to pay off old debts with direct debits, you must first ask yourself how old the debt is.

Generally there is one statute of prescription of debts, which means that debt collection agencies can only sue and win to collect a debt for a specified amount of time. The status of debt restrictions varies depending on the type of debt and the laws in your country regarding collection.

Learn your options regarding old debt – Under certain laws, acknowledging debt or making a payment can cause the limitation period to start over.

Keep in mind that even if your debt’s statute of limitations has passed, collectors can still try to repay the debt, and it may take longer for your credit rating to improve.

3. Use a credit advisory service

USA.gov recommends partnering with a credit advisory service that provides resources to help you manage your debt.

Counselors generally review your entire financial situation and create a personalized plan for a healthy financial life. You may find these debt service for free or at a low cost from credit unions, religious organizations or non-profit organizations.

Before you start working with a credit counseling service, make sure it is accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

Credit advice should also teach you about ways to improve your credit rating. A qualified advisor can help you negotiate with your creditors to have your payment status updated on your credit reports, which could increase your credit score

Watch out for these collection cases

Watch out for debt collection cases before you determine the strategy for your overdue debt. You should not make a payment until you have documented its history. For example, if you have an education debt, you have to pass through your student loan reports is a good way to find out if the blame is actually yours.

Here are three specific scenarios to look out for when paying off debt by debt collection:

Unless a collector successfully sues or request a court order to access your bank account or salary (seizure), they cannot withdraw money directly from your bank account to pay your debt.

Electronic payment can also give collectors access to your bank account if they receive your account number. Unless required by law, you don’t have to give them that access.

2. Not verifying your debt

Just because you’ve received notice from a debt collection agency doesn’t necessarily mean you’re in debt. Mistakes can happen, so before you pay a collection agency must verify that you actually owe some or all of the debt.

After you first contacted you, a debt collection agency must send you a written “validation notice” within five days. The message should contain the following information:

How much money is owed? The name of the creditor to whom you owe the debt How to proceed if you do not believe the debt is yours

The Federal Trade Commission advises that even if you think the debt is not yours, you should talk to the creditor at least once. This should give you an opportunity to confirm whether the blame is really yours. Make sure that you do not share any personal or financial information with the collector during this conversation.

If you think you don’t owe the debt, you can send a letter to the creditor stating that you don’t owe anything of the money requested. If you do this within 30 days of receiving the validation notice, the debt collection agency must send you a written verification of the debt before it can restart the collection process.

3. Not knowing your rights

Just because your debt is in collections doesn’t mean you aren’t protected from certain actions a debt collection agency can take against you. The Fair Collection Practices Act (FDCPA) protects you from harassment from debt collection agencies.

Some of these rules are:

They can only call you between 8:00 am and 9:00 pm, unless you explicitly choose a different time to be contacted. If you have a lawyer representing you in a debt collection matter, the debt collection agencies should contact your attorney and not you directly. If they know that your employer forbids you from being approached by them at work, they will not be able to contact you at work. A debt collection agency cannot harass you, threaten you, call you incessantly or use inappropriate language. If you notify a creditor in writing that you do not want to receive communication from them or that you refuse to pay a debt, they will not be able to contact you again unless they acknowledge your communicated request or inform you of a remedy for your debt.

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