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(The Financial Literacy Blog) – When someone charges a credit card, takes out a loan, or utilizes a service that requires post-payment—such as a hospital visit or utility connection—they are expected to pay that debt back. However, if someone doesn’t have the money to make their payment, they’ve forgotten to pay, or simply neglected to do so, their creditor will ramp up efforts to recover the funds they’re owed. After multiple attempts to collect payment on a debt that is past due, the creditor may turn to a debt collection agency for assistance.
What Are Debt Collection Agencies?
Debt collection agencies are entities that specialize in recovering overdue debts on behalf of creditors, such as credit card companies, student loan lenders, or utility providers. Typically, debt collection agencies operate through one of two methods. In the first method of operation, the debt collection agency is hired by the creditor on a contingency basis to collect the overdue money. Essentially, if they recover the money, the agency will earn a percentage of the amount collected or a flat fee. In the second method, the collection agency will purchase the debt from the original creditor at a discounted price. The person late on payments will no longer be indebted to the original creditor. Instead, they will now owe the money to the collection agency.
How Do You Find Out If Your Debt Has Been Sent to Collections?
Having your debt go to collections shouldn’t be too much of a surprise, as the original creditor likely reached out to you for payment several times—whether by phone, email, or mail. Also, if you borrowed money or utilized a service, it’s likely you’d know whether or not you’ve been making your required payments. If a collection agency has been tasked with recovering your debt, they will send you notices and requests for payment in the same manner as the original creditor. They will likely call you, send you emails, and mail you letters. However, they may even ramp up efforts and contact your family members if you aren’t responding. To be sure the collection agency is legitimate, and you aren’t being targeted by a scammer, you should check your credit report.
What Should You Do If Your Debt Has Been Sent to Collections?
While being contacted by debt collectors can be annoying, daunting, or both, it’s important you don’t ignore them. First, you’ll want to verify the debt is legitimate. Ensure the notice includes your name and mailing information, along with the name and mailing information of the debt collection agency. The notice should also name the creditor you originally owed debt to, applicable account numbers, and the amount owed as of a specified date.
After confirming the debt and checking your credit report for collection authenticity, you should make sure you pay the correct party. If the notice is from a collection agency, the payment should go to them—not the original creditor.
Oftentimes, debt goes to collections because of difficulty paying. At the end of the day, a debt collection agency wants to get its money. If you can’t pay in full now, they may be open to accepting a lower amount now, or the full amount through a payment plan, so don’t be afraid to try to negotiate. If you do choose to communicate with the collection agency, make sure all communication is in writing––especially if you negotiate any terms. Having records can serve as evidence in the event you need to contest anything.
What Happens If You Don’t Pay the Debt Collection Agency?
If you don’t pay overdue debt in collections, you will likely see a negative impact on your credit score. This can make it more difficult to secure loans, credit cards, or favorable interest rates in the future. Generally, debt in collections will remain on your credit reports for seven years from the first date of missed payment. The collection agency can also take legal action against you if the debt remains unpaid for an extended period of time. If the debt collection agency wins the lawsuit, they can collect payments by garnishments on your wages or by placing a lien on any property you own. Basically, if you continue to not pay, your property can be legally seized and sold by the agency to recoup their losses.
The Bottom Line
Dealing with debt collection can be stressful, but by communicating clearly, making an effort to pay down the debt, and negotiating within reason, you can navigate the process more effectively.