Got Debt in Collections? Debt Consolidation Can Ease the Pressure

Debts in collection can damage your credit, create enormous stress, and lead to lawsuits and potentially wage garnishment. If you have debts in collections, you need to resolve the problem as soon as possible. Debt consolidation may be the solution.

Though using debt consolidation to pay off debt in collections can sometimes be the best move you can make, you must be sure to do it strategically. You may be able to pay less than the full amount. You’ll also want to be sure that it’s a debt you need to pay and that it is a top priority.

Let’s take a closer look.

Options to Consolidate Debt in Collections

Before you start to consolidate your debts, it’s important to contact your creditors to see if they’re willing to negotiate. You want to try to get the best possible deal you can before you start researching loan options.

Be Proactive. If you don’t pay an unsecured debt — like credit card debt, medical debt, private student loans, or personal loans — the original creditor will sell your account to a collection agency. The collector will pressure you to pay, and could even sue you.

Don’t wait for the debt to end up in court. If you have a debt in collections you need to take the initiative. Here are some of your options.

Negotiate a Debt Settlement

Debt collectors pay an average of four cents for every dollar of debt they purchase. That means they can settle for less than the original amount of the debt and still earn a profit. If you plan to pay a debt in collections, try to settle the debt for less than the amount you originally owed.

This is a move for people who are good at bargaining. You will have to initiate the contact, make an offer, and haggle with the collection agency. 

Before You Contact Your Creditors

It’s important to do your homework before contacting any creditors. 

  • Make a list of each of your creditors, how much you owe them, and the interest rate on each debt
  • Add up the total.
  • Figure out how much you are paying toward debt each month. An online calculator can help.
  • Review your income and necessary expenses and decide how much you can afford to pay toward debt each month.
  • Prioritize your payments. You may wish to target your highest-interest debt first or your smallest debt first.

This information will give you the framework you need to negotiate effectively.

Start Negotiating

These steps will help you get the settlement you need.

  • Check on the collector. Online searches can tell you whether the collection agency has complaints with the FTC or CFPB. Know who you’re dealing with!
  • Call the creditor directly. For best results, reach out to the creditor or debt collector directly. Record the time and dates of your calls and the names of everyone you speak with. Write down their contact information.
  • Verify. Make sure that the person you’re talking to has the authority to make a settlement deal.
  • Point out your good traits. If you had a stellar payment history record before your financial situation deteriorated, be sure to mention that. If your debt situation was caused by factors beyond your control, mention that.
  • Don’t start off too high. Offer 10 to 40% of what you can actually afford to pay. If you open with your maximum there is no room for negotiation.
  • Be patient. The process could take several days and a few calls. 
  • Know when to walk away. If a creditor won’t budge, step away. Negotiating an amount that you can’t afford to pay doesn’t help you.
  • Send a letter. If you make a deal, write down the agreement and note the date and the name of the person you spoke with to the agency or creditor. Send it certified mail and keep your receipts. 
  • Get it in writing. Make sure the agreement is documented and don’t send any money until you have a written agreement.
  • Be careful. Do not give the creditor a blank check or authorize them to withdraw from your bank account. An unscrupulous company can go into your account and drain it.
  • Check your mail: The creditor should send you a copy of the agreement that details the settlement terms.
  • Check your credit reports: Make sure that all three major credit bureaus — Experian, Equifax, and TransUnion, have marked your debt as paid as agreed or settled.

This process won’t be easy. Collection agencies are not charitable and they will resist, but they will usually negotiate. If you’re considering bankruptcy, tell them. They’d rather negotiate a settlement than get nothing.

Read more: 7 Strategies to Pay Off Debt That is Already in Collections

Apply For a Debt Consolidation Loan

Debt consolidation is the process of taking out a new credit line and using it to pay off two or more old debts. This can help you pay off a debt in collections and may be able to resolve other debts as well.

Once you’ve totaled the amount you owe, it’s time to apply for a debt consolidation loan.

You will still have to pay off the new loan, but you will only have one payment to make every month instead of several, and you will get the debt collectors off your back. You may be able to get a lower interest rate as well. 

There are several sources of debt consolidation loans.

  • Online lenders offer personal loans, a common way to consolidate debts. Some personal loans are marketed specifically as debt consolidation loans. These typically pay the proceeds directly to your creditors.
  • Your bank or credit union may offer debt consolidation loans. If your banking history is solid they may offer you a good deal even with damaged credit.
  • Peer-to-peer lenders are a relatively new source of financing that may provide debt consolidation loans.

The problem with all of these options is that if you have debts in collections your credit has probably taken a beating. It may be difficult to get approved for a loan and if you are approved you may pay a high interest rate.

Use a Credit Card

If you have a credit card with a limit higher than the balance on your debt in collections, you can use the card to pay off your debt in collections.

This is a fast, simple way to pay off a debt in collections, but you need a limit that’s high enough to cover your debt. Card issuers will probably not increase your limit if you have a debt in collections.

The upside of using a card to pay off a debt in collections is that you have time to pay the debt off, and minimum payments are often affordable. The downside is that you will be paying an extremely high interest rate, and the longer you take to pay the more you will pay in interest.

If you use a credit card to pay off a debt in collections, try to negotiate a reduced payment or interest rate first.

Set Up a Debt Management Plan

Nonprofit credit counselors offer debt management plans. You will make a single monthly payment to the credit counselor, who will distribute the money to your creditors.

The credit counseling agency will also negotiate with your creditors, seeking better payment terms and possibly a reduced amount. There is no guarantee that a collection agency will be willing to make concessions.

File for Bankruptcy

If you have no realistic possibility of paying your debts, bankruptcy is an option.

You’ll need to decide which type of bankruptcy to use. If your debts are far above your capacity to pay you are likely to qualify for Chapter 7 bankruptcy. A Chapter 7 bankruptcy discharge will eliminate most unsecured debts, like credit card debt, medical debt, and payday loan debt.

Some of your assets may be sold to pay some creditors, but this is rare. About 96% of Chapter 7 bankruptcies are closed with no liquidation.

Tax debt, alimony, child support, and most student loans cannot be discharged in bankruptcy.

Bankruptcy will remain on your credit report for up to ten years and will hurt your credit score. Most people who file for bankruptcy already have badly damaged credit, though, and the relief of a debt discharge may be worth it. Your credit score can recover in time.

New Rules for Medical Debt

Health care is both essential and expensive, so debt collection and reporting rules treat medical debt as a special case. Medical debts are not the consumer’s choice, and payments are often delayed by complex negotiations among patients, insurers, and providers. Because of the special conditions, it may not make sense to consolidate medical debt. It will depend on your circumstances and how long you’ve owed the debt.

The following rules are effective as of July 1, 2022.

  • Unpaid medical bills will not be sent to collections or placed on credit reports for 12 months.
  • Paid medical bills will no longer be listed on credit reports.
  • Medical bills in collections under $500 will not be reported (starting July 2023).

If you have medical bills or health conditions that could produce medical bill issues, you should be aware of these changes and other special policies on medical billing.

Read more: How to Get Help with Medical Bills

Can a Debt Collector Sue You?

Debt collectors can sue you to collect a debt. Debt collection lawsuits are the single most common type of civil suit, and many cases involve relatively small debts. If a debt is legal and not past the statute of limitations, you can be sued.

What’s the Statute of Limitations on Debt?

A statute of limitations sets a limit on the time in which a party can initiate a legal proceeding against you. The statute of limitations on debt varies with your state and the type of debt. You can learn more here.

Under new regulations that took effect in Nov. 2021, a debt collector cannot file or threaten a suit if the statute of limitations on your debt has expired.

The Court Process

If a debt collector files a suit, you will receive a summons. Don’t ignore it. If you do not reply or appear the judge will probably issue a default judgment against you. Your wages could be garnished or a lien could be placed on your property.

You will have the chance to reply to the accusations and appear in court to defend yourself.

If you fail to appear or comply with a court order a judge can order your arrest for contempt of court. Always follow the instructions given in any court document.

Challenging a Debt Collection Lawsuit

You can fight back against a debt collection lawsuit, especially in these cases:

  • The debt is not yours.
  • You have already paid the debt or negotiated a payment plan.
  • The statute of limitations on the debt has expired.
  • The amount or other details cited in the suit are incorrect.

Many debt collectors file large numbers of lawsuits and they often don’t have full documentation. They know most debtors won’t show up, and they count on getting summary judgments. Appearing and contesting your case may be enough to get it dismissed.

Do You Need an Attorney?

A lawyer will give you a better chance of winning a debt collection lawsuit. If you need a lawyer’s help and can’t afford it, search the American Bar Association’s free legal assistance page, the lawhelp.org site, or the US Government’s legal help portal.

How to Stop a Debt Collector From Calling Work (Or Home)

The Fair Debt Collection Practices Act and the newer Regulation F place strict limits on when and how often a debt collector can call you. Some collectors don’t follow these rules, but if you know your rights you are in a position to insist.

  • Debt collectors can’t call before 8 a.m. or after 9 p.m. without your consent.
  • Collectors can’t call your workplace if you tell them you can’t receive calls there.
  • Collectors cannot discuss your debt with anyone but you, your spouse, or your attorney.
  • Collectors cannot use obscene, or threatening language or bombard you with constant calls.

For a full review of the rules on contact by debt collectors see the FTC’s page on the topic.

You can instruct a debt collector not to contact you at all, and they will have to comply. Be careful: this could encourage a collector to take your case to court.

Make the Debt Collector Validate the Debt

A debt collector has to send you a written notice with details about your debt within five days of their first contact with you. This is called a Debt Validation Letter. If they do not send this notice their collection efforts are illegitimate and you should not pay.

Read more: Learn about Debt Validation Letters and what they’re required to include.

What if the Collection Agency Refuses to Comply?

The Fair Debt Collection Practices Act and the more recent Regulation F give consumers clear rights and place restrictions on what debt collectors can say or do. It’s important to know your rights.

Some debt collectors will push beyond what is legal. If they do, you can push back. You can file complaints with the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and your state’s Attorney General.

Always keep a record of all communications with a debt collector, but don’t record calls unless it is legal to do so in your state. Keep copies of emails or messages, and note the time and date of each call and who you spoke to.

If you’re getting calls more frequently than the law allows, phone records can back up your complaint.

Watch Out for Debt Collection Scams

Anything that involves money attracts scammers, and debt collection is no exception. Scammers may call you and try to pressure you into paying a debt you don’t owe or pretend to be the legitimate collectors of a debt you do owe. 

Don’t fall for it. Learn the warning signs of a scam.

If someone tries to scam you, report it to the FTC, the CFPB, and your state’s attorney general. Reports help these agencies catch scammers, and that helps protect all of us.

Learn more about debt collection scams by watching this video:

The Bottom Line

If possible, you want to keep debt from going to collections. Collection accounts drive your credit down and nobody wants to get bombarded with collection calls.

If you already have a debt in collections, don’t panic. Debt consolidation can be the solution. It will take a little bit of legwork, but it can also mean a fresh start for your finances.

FAQs

What if I Get a Debt Collection Call From the IRS?

Hang up. If you have an issue with the IRS they will contact you by mail. Anyone who calls you and claims to be from the IRS is almost certainly a scammer.

What is NMLS and What Does it Mean for Debt Collection?

NMLS stands for Nationwide Multistate Licensing System & Registry. It’s a multi-state licensing system for non-depository financial service providers, including debt collectors. Many states require collectors to hold an NMLS license. Learn more about NMLS here.

How Long Will a Debt in Collections Stay On My Credit Report?

Debts drop off your credit report seven years from the date of the first delinquency after which the account was not subsequently brought up to date. Don’t confuse this with the statute of limitations, which limits the time in which a collector can sue you.