Debt can be one of the worst financial pressures an individual can go through, and can easily spiral out of control in very little time. Ignorance may not always result in bliss. Especially when it comes to debt. If your debt goes into collections, what happens next?
Why will debt go into collections?
- Ignoring the creditor’s letters and phone calls
- Unable to work out an agreement to repay or settle the debt
- Set up a repayment schedule but fail to make the payments
If you are in any one of these situations, your bill will most likely be turned over to a collection agency or sold to a debt buyer. Your delinquency reported to a credit bureau. This will likely happen within three to six months after you default. Credit card and telephone service debts, other utilities, car, and medical debts are the types of debt that are most likely to be sent to a collection agency.
What happens when the collection agency calls?
You can expect to hear from a collection agency as soon as the original creditor passes on your debt. Once you receive the call it is recommended that you verify the validity of the claim, how old the debt is, and how long it’s been in collections. Remember, the collector must prove you owe the money. Do not acknowledge a debt with a collector or agree to any payment until the collection agency ‘validates’ the debt to prove you do indeed have to repay it. You can do any of the following once you assure that the debt really belongs to you.
- The best strategy is to pay it off immediately. If the debt has just recently gone into collections and you make the full payment immediately you might have some leeway to avoid damage to your credit report. Typically you have 30 days until your debt is reported to the credit bureaus.
- If you are unable to do an immediate settlement, make sure you inform the collection agency of your intention to pay.
- Negotiate a payment agreement with the collectors. Document your agreement and course of action, and request a copy of the agreement on the collector’s letterhead before you make payments.
- Save up to pay your debt in full to the collection agency to minimize the negative implications on your credit report.
How will debt in collections impact my credit score?
Even with the exception that you pay off your collectors in full, the entry will remain in your credit report for seven years and will me marked as paid. This entry has a negative effect on your credit report, but will lessen over time. Debt that goes into collection, in any case, will reduce your credit score by at least 100 points. Therefore, it’s important to avoid situations where your debt may go into collections by continuously monitoring your payments.