How to Deal with Collection Agencies
Knowing how to deal with collection agencies can save you a lot of time, money, and peace of mind.
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Once upon a time, Robin Hood dealt with the sheriff of Nottingham by driving him from the city forever. Unfortunately, that age is behind us and we have to deal with debt collectors in a more civil manner.
Also unfortunately, we are in a financial mess of historical proportions with high unemployment, slowing economies, and a record $1.6 trillion in student loans in the US. Not exactly the best year when compared to the recent past.
Many Americans are having a hard time making debt payments and even taking care of their bills on time – however, the times are not tough for everyone. Over 50% of collections agencies have prospered in the COVID-19 environment, which is a clear indication that we must take care of our money right now.
If collectors have already caught your scent, you should know how to deal with them. If you don’t, it can cost you more money and emotional well-being than anyone is willing to pay.
Luckily, you have many legal rights that allow you to shut your collectors up and negotiate with them to get a better deal. Because we don’t want anyone to lose their hair because of debt, we’ve provided the most comprehensive guide explaining how to deal with debt collectors.
In a moment, you will learn what the collectors’ legal boundaries are, what you can do to get a better deal, and what you should do to avoid scammers. So, without further ado, let’s jump right into it.
How Debt Collectors Work
If you aren’t making timely payments for your debt, your lenders will feel concerned for their income and will occasionally remind you to pay. If you’re still not making enough payments, they will likely try to offer you extended loan terms or even offer to forgive a part of your debt.
However, if none of this is working, as a last resort they will hire a collections agency. Collectors are expensive, which is why lenders don’t like to hire them unless it’s necessary. But, when they do hire them, your problems will grow like Mickey Mouse’s magic beans.
A collections agencies’ job is to pressure you via phone and mail so you eventually pay the money you owe – that’s why they can be so rude. If all their attempts fail, though, collection agencies work by trying to force a payment one way or the other.
What Debts Can They Collect?
Most kinds of unpaid debts will invoke the annoying presence of collectors. The types of debt they can collect include:
- Credit card debt
- Mortgage or other home loans
- Auto loan debt
- Business debt
- Personal loans, such as payday loans
- Medical bill debt
- Student loan debt
- Unpaid phone or utilities
Types of Debt Collectors
Not all kinds of collectors are aggressive and rude in their attempts to take your money. Depending on where you stand with your payments you might encounter these types of collectors.
1. Internal Collectors
These are not collectors per se. Rather, they are just agents from the company you borrowed from and all they can do is politely remind you to pay and also to offer a restructuring of the debt in question.
Indeed, they have to be polite because they don’t want to sully their company’s reputation. If you’re 90 days overdue with your payments, you will likely still get calls and reminders from internal collectors. If the unpaid debt continues, however, your lender will hire some less savory characters to help them.
2. Collections Agencies
The job of collections agencies is to pressure borrowers to pay up, essentially – that’s probably why most people are not enamored by their presence. If your debt reaches a collectors agency, that means you will get a collection in your credit report which will drive your credit score dramatically.
Also, this means you will receive regular phone calls and visits from people who will subtly threaten to sue you if you don’t pay your debt. If at all possible, you should avoid this experience. Aside from being unpleasant, dealing with collectors means you will have a harder time building your credit due to the collection they will put on your credit report.
It’s easy to figure out why borrowers don’t love collectors but you should know that lenders don’t like them either. These agencies charge roughly 25% to 60% of the money they collected for their services. This is why you have ample space to negotiate before your lenders call upon the collectors to get the job done.
3. Debt Buyers
If all else fails, a lender might just sell your debt to a debt buyer. This is even less profitable for lenders as they can only sell your debt for pennies on the dollar – more precisely, they get $0.04 for every $1 of the debt on average.
Debt buyers usually buy old debt, which means they might not even be sure if you actually owe the money. Sometimes, they can even buy outdated debt you don’t owe anymore.
That’s why it’s a good idea to ask for debt verification – if they can’t prove that the unpaid debt is yours, the buyer cannot legally lay claim to it and they have to leave you alone.
Know Your Rights – Collectors Must Follow Rules, Too
Collectors are very pushy but there are legal limits to their pushiness – and you should be aware of them.
The Fair Debt Collection Practices Acts (FDCPA) mandates what collectors can and cannot do – this law affects debt collectors and debt buyers alike.
What Are Debt Collectors Allowed to Do?
Collectors might be constrained by law, but they are still legally allowed to use many unpleasant methods to get you to pay your debt. Here are some of them.
- They can call your home – Collectors can call, send letters, email, and text messages to your home. All messages must clearly state they come from their collections agency.
- They can charge interest – Collectors can keep charging you extra interest for as long as you don’t settle or pay your debt. However, they can only do so as defined by your contract with your lender. Moreover, some states limit the maximum fees and interest collectors agencies can charge.
- Lawsuits are an option – Collectors can take you to court if you don’t pay them. If you don’t show up at court to contest the lawsuit, you forfeit the chance to defend yourself – which you shouldn’t do. If the collectors win the suit, they can get a garnishment order against you – this means your bank will be made to direct your funds directly to the collectors.
- Garnishing wages – Collectors can garnish your wages if they win a lawsuit they filed against you. This means your employer must give a part of your paycheck directly to the collectors every month. Keep in mind that collectors can only do this after they’ve won the lawsuit and gotten a garnishment order.
- Leveraging with old debt – Debt has an expiration date – most state laws say that 4 to 6-year-old debt is considered outdated and that you don’t have to pay it. These are called “zombie debts” and collectors can pressure you to pay them. However, they can’t sue you for zombie debt – they can just remind you to pay it, but you are not obliged to do so at all.
What Debt Collectors Cannot Do
Collectors have some legal leg space when it comes to what they can use to pressure debtors. However, they are also very limited – it’s very important to know what they are not allowed to do to pressure you to pay.
- Withhold information – Collectors must formally inform you (in writing) of how much you owe and to whom. They have to send the letter with this info within 5 days of first contacting you – the letter must also explain what you should do if the debt in question isn’t yours.
- Call you whenever they want – Collectors can call you, but not whenever they feel like it. They are allowed to call you between 8 a.m. and 9 p.m. and they can’t call you at work if you told them not to do so.
- Call you after you tell them to stop – You can spare yourself the annoying phone calls and visits altogether – just send a letter to the debt collectors. This message should say they are only allowed to speak to your attorney directly, and you should send it via certified mail so you have proof they got it.
- Annoy your relatives – The only case when collectors can call your friends and relatives is when they want to know how to get in touch with you – that’s it. They are not legally allowed to pester other people to pay the debt for you.
- Lie about their identity – Every time collectors contact you, they must clearly state who they are and why they’re calling. If they claim to be from the police, credit bureaus, or the governments, they’re breaking the law. Also, they can only claim to be lawyers if they are actual licensed solicitors.
- Lie in general – Everything collectors say to you or someone else about you must be true. For example, they can’t say you owe more than you do and they can’t tell you that a letter you sent is a legal document if it isn’t. Also, they can’t lie to the credit bureaus about you.
- Use threats – Debt collectors are often tempted to subtly threaten you but that falls outside their legal boundaries. First of all, you can’t go to jail – owing money isn’t illegal. Second, they can’t threaten to take your property or wages. Collectors can only lay claim to your possessions if they file and win a lawsuit against you.
- Utilize your payments for other debt – If a collector is trying to get money for multiple debts from you, they cannot accept the funds you gave them for debt A and use it to settle debt B. You choose towards what debt your payments go to.
- Seize federal payments – If they win a lawsuit against you, collectors can garnish your wages and your bank account balance. However, they can not take your federal benefits payments. These include veterans benefits, Social Security checks, SSI, FEMA assistance, and disability benefits.
5 Steps You Should Take When Dealing with Collectors
Debt collectors just want your money and you will probably need to give it to them eventually. However, there are a few steps you can take to make this easier for you – in some cases, you can even lower the amount you have to pay or negotiate to have the collection removed from your credit report. Here’s a roadmap you can use when dealing with collections agencies.
1. Gather information – First, find out exactly how much you owe and to whom – also, contact your lenders to check if the collectors who contacted you are legit and not some sort of scam.
2. Ask for debt verification – The collections agency is legally required to prove you owe the debt in question. If they cannot provide legal documentation as evidence, they can’t charge you the debt and must remove the collection from your credit report.
3. Negotiate – As we mentioned before, collectors just want your money – you can give it to them and ask for something in return. You can offer to pay off your debt immediately but for a discount – a.k.a. settle the debt. Better yet, if you know how to write a ‘Pay for Delete’ letter, you might get the collectors to remove the collection from your credit report – this can help your credit score big time.
4. Don’t avoid the collectors – It is well known that debt collectors are a scourge on one’s nerves, but ignoring them is not a good idea. If the collectors cannot reach you, they will eventually sue you – and if they win the lawsuit, they can seize your property and garnish your wages.
5. Get help if you need it – Collectors just want your money and they might be interested to offer you beneficial terms to pay it off. Alternatively, you can try to consolidate your debt either through a nonprofit agency that will negotiate with the collectors for you or a debt consolidation loan for borrowers with bad credit.
Dealing with Debt Collectors During COVID-19
The pandemic has been the most devastating blow to our economy in recent history – one in four Americans have missed bill payments since COVID-19 started. This troubling financial situation is why lenders and government agencies often offer beneficial terms and deals to lenders, so at least we have that.
But if you think debt collectors have a similar level of understanding, you are wrong. Collections agencies are thriving in today’s unstable environment and are more aggressive than ever – even ambulance companies are hiring collectors to squeeze their clients for money.
Even though times are tough, you can expect collectors to be as driven as ever, but that’s not the end of our problems. Since the pandemic broke out, we have seen an explosion of new scams – these include fake collectors who want to (illegally) garnish your stimulus checks.
Strictly speaking, dealing with collectors today is the same as before, but you’re more likely to come across aggressive agents who step outside their legal bounds. Remember, you have rights and if collectors don’t respect them, they will lose their bounty. But more importantly, as a debtor, you must be aware of the various scam artists who have been on the prowl lately.
How to Spot Debt Collector Fraud
The COVID-19 pandemic has created a very vibrant, new environment for scammers of all sorts – this includes scammy debt collectors. It’s not uncommon to get a call from fake collectors who just want to take your money and disappear – and it’s important to sniff them out ASAP.
Scammers work in mysterious ways – sometimes they can have your personal information and seem like the real deal. Uncovering a well-done scam isn’t easy but there are a few red flags that will help you quickly determine whether a company is legit or not.
Here are some telltale signs that you’ve come in contact with fraudsters.
- You don’t know anything about the debt in question.
- They don’t want to give you their phone number and mail info.
- They ask for personal data like your Social Security Number.
- They are very aggressive and threaten to put you in jail.
How to Deal with Scam Collectors
The process is simple – ask them questions they can’t answer if they are fraudsters and then report them to the authorities. In the meantime, don’t give them any personal info whatsoever because that will expose you to further criminal schemes. Here’s a little list of tips for safely dealing with the most unsavory of characters.
- Ask for information – A legitimate collector must give you their mailing address and phone number – scammers will likely avoid doing this. If they give you false info, you can easily check it to see if they’re lying.
- Ask for validation – You can ask the collectors for a validation notice – this is a document that outlines what you owe and to whom. Only real collectors can provide this notice, which is why scammers will try to work around this.
- Ask to be left alone – If the fake collectors give you their address, send them a letter saying you don’t want them to contact you directly anymore. Collectors must accept this request – if they don’t, you know they are not legitimate.
- Ask your creditor – Lenders are the ones who hire collectors and they can confirm if the agency that called you is real. This is the safest method to find out what’s the truth.
- Do not pay – If you’ve confirmed with it your creditors and are completely sure that the collectors calling you aren’t real, don’t pay up. Scammers will likely still pester you even if you give them what they ask.
- Never give them information – Your personal data and financial info should be kept from the public eye. If scammers get a hold of this information, they can sell it to other scammers or use it to open lines of credit in your name – needless to say, this will cost you and can obliterate your credit score.
- Report the scam – Don’t hesitate to report the scammers – even if you’ve figured out their scheme, they might still be in a position where they can hurt others. If you are sure the collectors calling you are fraudsters, contact your state’s Attorney General or the Federal Trade Commission (FTC).
Can Debt Collectors Take Your Car?
No – at least not before they win at court. Collectors agencies can sue you and if they win, they can get permission to seize your property (e.g. your car). If a collector is threatening to take your car they are trying to intimidate you – which is illegal. If this is the case, you can report them to the Consumer Financial Protection Bureau (CFPB).
How Do You Get Out of Paying a Debt Collector?
In order to get out of paying a debt collector, you first need to ask for official debt verification and check with your creditors to see if the debt in question is really yours. Then you can try negotiating, either to settle the debt or get the collection removed via a ‘Pay for Delete’ letter. If you simply cannot make the payments, you can try to make things easier with debt consolidation.
How Bad Does a Collection Hurt Your Credit?
Missed payments and collections are some of the most damaging items you can have on your report. Depending on what else is on your credit report, a collection can lower your score by up to 100 points or even more in some cases.
How to Deal with Debt Collectors When You Can’t Pay
The first thing you can try is negotiation – offer the collectors to pay off 10% of the debt (or whatever you can) on a certain date and they might agree. This approach usually ends with collectors giving you stretched-out payment terms. Also, if they ask for your banking information, don’t give it to them – your bank account is for your eyes only.
If paying is truly out of the questions you can always file for chapter 7 bankruptcy. This is the nuclear option in a way but it won’t do as much damage as you might think.
The bankruptcy will sit on your credit report for the next 10 years and drive down your score by 160 to 220 points. It is very difficult to get bankruptcy removed from your credit report. This damage can single handedly turn a great credit rating into an average one – but that’s the end of it.
The upside to filing for bankruptcy is that it can eliminate all your dischargeable debt. The types of debt you can discharge with a chapter 7 bankruptcy are some personal loans, credit card debt, cell phone bills, overdue medical bills, old store card debt, and utility bill debt.
Bankruptcy is not something you should take lightly, so it’s best to speak to a bankruptcy attorney before doing anything drastic. However, if successful, chapter 7 bankruptcy can discharge your debt and let you keep all your property.
How to Pay off Collections
The first option is to offer a lump sum payment. If you’ve got the money, you can pay the collector in one go – this is the cheapest option because getting rid of the debt will get rid of the accumulating interest too. Naturally, paying everything off like this will increase your credit score almost immediately.
The second option is setting up a payment plan. Most collectors will accept to restructure your payment terms – just be realistic with what you can pay and make sure to get all the tiny details in writing.
The third option is to try and settle for less. You can send a letter to your collectors saying that you cannot pay the full amount but are willing to take care of 80% of the debt with one lump sum payment. However, this will hurt your credit even more and there’s no guarantee that the collectors will agree to your proposal.
Can I Pay the Original Creditor Instead of the Collections Agency?
This depends on who owns the debt. If your creditors still own your debt then you can pay them directly – in this case, the collectors were simply hired to try and squeeze the money out of you.
One the other hand, your creditors might’ve sold the debt to the collections agency. In this case, the creditors are out of the picture and you have to pay the collectors directly.
Can a Debt Collector Refuse a Payment Plan?
Yes – the collectors can decline any offer that’s not in line with the contract you signed with your original creditors. However, it’s in the collectors’ interest to get your money, which is why they can be convinced to give you beneficial repayment terms.