It’s stressful having debt in collections. The debt collector is probably calling you, and you may be threatened with a trip to court, or wage garnishment. You need a solution fast, but what are your options? Debt consolidation may be your best bet.
Debt consolidation is the process of combining multiple debts into a single monthly payment. Consolidation doesn’t eliminate your debts, but it simplifies the payments, makes late payments less likely, and may get you a better interest rate. If you use debt consolidation for collection accounts, you can also get those collectors off your back!
Consolidate All of Your Accounts That Are In Collections
Consolidating debt in collections is a challenge because if you have multiple debts in collections you probably have badly damaged credit, which limits your options and makes some common consolidation methods difficult.
You will still have several strategies to weigh.
7 Ways to Deal With Debts that are Already in Collections
There are three main options for consolidating debt in collections.
1. Debt Management Plan
Debt management plans are offered by nonprofit credit counseling agencies. Most of these agencies offer a free initial consultation. A counselor will review your situation and your options and help you decide whether a debt management plan is the right choice for you.
If you decide on a debt management plan, you will make one monthly payment to the credit counseling agency. They will distribute the money to your creditors. They will also negotiate with your creditors for better terms and potentially debt relief.
You will pay a fee to the counseling agency, and you may be required to close some credit cards or other accounts. Be careful when choosing a credit counseling agency: many are legit but some are scams. Do your research and check the company’s reviews and reputation.
2. Debt Settlement Company
Debt settlement companies are for-profit businesses. Many of them offer consolidation in a manner similar to a Debt Management Plan: you’ll make one payment to the settlement company, and the settlement company will pay your creditors.
A debt settlement company will prioritize negotiating reduced payment amounts for your debts. You will pay the company a percentage of the reduction in your debt that they negotiate. Settlement can reduce your debt load, but it may damage your credit.
Debt settlement companies may ask you to stop making payments on debts while they negotiate. This can encourage a company to settle, but may also encourage a creditor to send your account to collections or a collector to sue you. Be careful.
Choose your debt settlement company carefully. Not all companies are legit.
3. A New Loan
Using a loan is a traditional method of debt consolidation. You borrow money, use it to pay off your other debts, and then pay off the new loan. Bad credit makes this difficult, but it’s not impossible. Here are some possibilities.
- Debt consolidation loans are a form of personal loans. It may be difficult to get a loan at a competitive rate with bad credit, but lenders like Upstart, Navy Federal, One Main Financial, and Upgrade will deal with borrowers who have compromised credit.
- Home Equity Loans are secured by your home, so approval is easier and interest rates are low even with bad credit. If you own a home and have enough equity these can be a great consolidation option, but be careful: if you can’t pay you could lose your home.
- A Home Equity Line of Credit or HELOC is like a home equity loan, but it’s a revolving account. You can keep drawing up to a fixed limit. You may be tempted to draw more than you need, and if you can’t pay you could lose your home.
If you choose a consolidation loan, it is vitally important that you stop incurring new debt until you have paid off the consolidation loan. If you keep taking out loans or relying on credit cards your strategy will fail.
Negotiate with the collection agencies first and try to reduce the amount you’ll pay before settling on a debt consolidation loan. If you can cut the amounts you’ll need a smaller loan that’s easier to pay. We’ll talk more about negotiation later!
Other Options for Debt Relief
If you have multiple debts in collections you may feel that there’s no way out. That’s not the case. You still have options. None of them are perfect options: your debts won’t simply disappear. Each option has its own risks and costs, but also opportunities.
All debt relief strategies have one thing in common: you must stop taking on new debt while you clear your old debts. If you keep piling on new debt you will just make things worse. Lock up those cards and stick to your budget!
Read more: A Complete Guide to Debt Relief Programs
Here are some to consider.
Nobody wants to file for bankruptcy, but it’s a legitimate option if you have no realistic way of paying your debts. Bankruptcy can discharge most of your unsecured debts: you’ll no longer have to pay them. That’s a chance at a fresh start.
Bankruptcy can discharge credit card debt, medical debt, payday loan debt, personal loans, and other unsecured debts. It will not affect alimony or child support, most tax debts, most student loans, or many court-imposed fines or settlements.
In a Chapter 7 bankruptcy — the most common type — your assets can be seized and sold to pay your creditors. Many assets are exempt, and 96% of Chapter 7 cases conclude without asset seizure.
While there will be some costs incurred in a bankruptcy filing, it’s possible to minimize your expenses. Many bankruptcy attorneys offer free initial consultations that can help you decide if bankruptcy is right for you. You can also try Upsolve, a free app designed to help consumers file a simple Chapter 7 bankruptcy without a lawyer.
Bankruptcy will have a significant impact on your credit score, but it will give you a chance to start over again, and the impact will fade.
5. Negotiate With Your Creditors
Many creditors are willing to work with debtors who approach them in good faith and try to work out a solution. There are several options.
- Hardship plans. Many credit card companies offer hardship plans for debtors affected by illness, job loss, divorce, or other hardships. They may offer an extended payment plan or an interest rate reduction. These plans are not advertised; you will have to ask.
- Extended payment plans. Many creditors will negotiate a plan that allows you to pay your debt in installments. This will help protect your credit, as long as you make the payments on time.
- Debt settlement. You will offer a reduced sum as full payment of the debt. If the creditor thinks the alternative is not getting paid, they may accept. The debt will be reported as settled for less than the amount owed, and that will harm your credit.
You will have to decide on your priorities. If your credit score is still reasonably good you will want to protect it, even if it means paying more.
If you have multiple accounts in collections your credit score has probably taken a beating already. In this case, your priority may simply be to get the collectors off your back. Settlement or bankruptcy might be a better option in this case.
Watch this video by Dave Ramsey: How Do I Negotiate Debt That’s 6 Years Behind?
6. Balance Transfer Credit Card
A balance transfer card can be an effective way to consolidate debts, particularly credit card debt.
These cards have an extended zero-interest promotional period, often up to 20 months or even beyond. You can transfer your other balances onto the new card and pay them back without having to spend for interest.
You’ll have to be sure to finish paying off the balance before the promotional period expires, or you’ll be right back to paying high interest. Pay on time. With many balance transfer cards, a late payment will cancel the promotional period.
Most balance transfer cards require good credit, so they won’t be an option if your credit is already badly damaged.
7. Payday Alternative Loans
Nothing will derail your debt relief strategy faster than taking on new debt, especially high-interest payday loans. Many credit unions offer payday alternative loans designed to help members avoid the payday loan trap.
These loans are generally too small to use for debt consolidation, but if you are caught short between paychecks they can bridge the gap without breaking your budget.
What to Do if Debt Collectors Are Harassing You
The Fair Debt Collection Practices Act (FDCPA) sets strict limits on what debt collectors can say and do. New rules under Regulation F have expanded these limits. Many collectors violate these rules, but if you know your rights you can stand up for yourself.
Every debt collector must send you a detailed statement validating your debt within five days of their first contact with you. Do not pay or even speak to a debt collector until you have received this notice and confirmed that all details are accurate.
Be aware of these rights.
- A debt collector cannot use abusive or obscene language
- A debt collector cannot threaten you with debt or imprisonment
- Debt collectors cannot impersonate an attorney or any law enforcement or government official
- Collectors can use phone, email, and text messaging, but you can specify what methods they can use to reach you
- You can tell a collector to cease all contact. Be careful: this could give them an incentive to sue you
- Collectors cannot call you at inconvenient hours or at work, if you tell them not to.
- Collectors can only call you once a week per debt
- Collectors cannot sue you for a debt if the statute of limitations has expired. Be careful about making payments or admitting liability for old debts. You could restart the statute of limitations
You can learn more about your rights and the debt collection process from the Federal Trade Commission (FTC).
To learn more about the Fair Debt Collection Practices Act, check out this video:
Take Control of Your Financial Situation
If you’re struggling to consolidate debts in collections, your overall finances are probably in trouble. You’ll need to deal with those collection accounts, but you’ll also need to clean up your financial life.
Review Your Credit Report
Many people with serious debt problems avoid reading their credit reports. It may not be happy reading, but understanding your credit report is the first step toward rebuilding your credit and your finances.
Check your credit report for errors. If you find accounts with errors you can dispute them and have them removed.
Get Your Credit Score
Your credit scores are based on the information in your credit report. Most free credit score providers will give you a score from VantageScore, but most lenders use the FICO score.
Many credit card providers, banks, credit unions and other financial service providers can provide you with your FICO score, or you can get them from MyFICO if you are willing to pay for them.
FICO divides cores into these brackets.
- Very poor credit: 300-499
- Poor credit: 500-600
- Fair credit: 601-660
- Good credit: 661-780
- Excellent credit: 781-850
Some lenders may use different ranges, but the differences will usually be small. Better credit means easier approval and lower interest rates for loans and credit cards. With poor credit, it will be hard to get approved and interest rates will be high.
Assess Your Debt
After reviewing your credit report, make a list of all of the legitimate debts, with the interest rate, the minimum monthly payment, and the date that the account became delinquent, if it is.
You need answers to these questions.
- Are any of these debts near or past the statute of limitations in your state? If they are you may not need to pay them and they will age off your credit report soon
- Can you negotiate a hardship plan or extended payment plan that will make it easier for you to pay?
- Can you settle any of the debts for less than the original amount?
- Can you use any of the debt consolidation options discussed above?
Once you’ve answered those questions you can prioritize your debts and build your own strategy for getting out of debt.
Track Your Income and Spending
A working budget is at the core of any personal financial plan. You have to know what you’re earning, what you’re spending, and what you’re spending your money on.
Record all of your earnings and make a habit of writing down every expense, no matter how small. That will show you where your money is going and where you can cut back.
Once you know your spending pattern. Set up a budget that organizes your spending and tells you how much you can devote to debt payments every month.
Open a Bank Account and Start Saving
With living expenses rising and debt payments to make, saving may be the last thing on your mind. It’s still worthwhile to set up a savings account and begin putting money away.
An emergency fund can save you in a shortfall or if an unexpected expense arises, and keep you from having to take on high interest debt. Keep saving and you may even put away enough to start investing.
If you can’t save a lot, save a little. Anything is better than nothing!
The Bottom Line
Debts are stressful, and having multiple debts in collections is even more stressful. If you face your situation head-on, review your debts carefully, and look at your options for consolidating debt in collections, you can get those collectors off your back and pay off your debts!
Unsecured debts are debts that are not secured by collateral. Credit card debt, medical debt, most personal loans, and payday loans are all unsecured debts. Mortgages and car loans are secured debts because they are secured by an asset that the lender can seize if you don’t pay.
Unsecured debts have a higher risk for the lender, so they usually have higher interest rates and stricter qualification standards.
You cannot be arrested or imprisoned for failure to pay a debt. A debt collector is not allowed to threaten you with arrest or jail time. If a collector makes this threat, stop talking to them and complain to the FTC and CFPB.
Debt collectors can sue you. If they do, you can be jailed for contempt of court if you fail to follow court instructions or appear for hearings. If you are sued you must follow all court instructions and appear when the court orders you to appear.
The Federal Trade Commission (FTC) is an independent government agency tasked with preventing unfair, deceptive, and non-competitive business practices. The agency regulates a broad range of business activities, including fraud and deceptive advertising.
The Consumer Financial Protection Bureau (CFPB) provides similar functions focused exclusively on the financial industry, including lenders and debt collectors.