What Happens when a Bill goes to Collections?

Why does a Bill go to Collections?

If you’re unable to pay a bill, your lender may get a collections agency involved. But before that happens, your creditor will hold onto the debt for a predetermined grace period. For most lenders, like credit card companies and banks, that’s 30 days. If you’ve failed to pay your bill for longer than the grace period, it’s considered delinquent. This is reported to credit bureaus, and your lender will reach out to you in an attempt the get you to pay what you owe. After about 180 days, your lender will sell your debt to a collection agency to recoup some of their financial loss. How much the agency pays is determined by how likely you are to pay off your bill.

A collection agency acts as a middleman between you and the lender and purchases your outstanding debt from the lender. Once your bill goes to collections, you’ll still owe money, you’ll just be paying the collection agency instead of your original lender.

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn More

Do Collections Affect your Credit Score?

If a bill goes to collections, it can affect your credit score. Payment history makes up about 35% of your FICO score. It’s a heavily weighted aspect and can affect your ability to be able to be approved for a line of credit. What’s more, debt collections will remain as a part of your credit score for seven years after your outstanding debt was sold to a collection agency. This can hurt your credit score, but the effect will lessen over time.

You can remove the collections account from your credit report by asking the major credit bureaus for a goodwill deletion, but only if you’ve paid your outstanding debt in full.

Dealing with a Bill in Collections

If you’ve never had a bill in collections, it can be a stressful, unnerving experience. Learning that your account is in collections can come as a surprise. Thankfully, there are a few regulations that collections agencies are required to follow, and a few steps that you can take to protect yourself.

First, you’ll need to verify that your account is actually in collections. Collectors are legally required to send you a letter that outlines how much money is owed and should be able to provide documentation to prove their legitimacy. If you’ve already paid off your outstanding bill, or if the debt isn’t yours, you can dispute the debt. This will stop collection efforts and the agency will have to investigate your claim. During the investigation, the debt will not appear on your credit report. If the debt is in fact yours, the collector should be able to verify that with documentation. If not, they’ll stop trying to collect the debt and will pursue the real owner of the debt.

Once you’ve confirmed that you’re dealing with a collections agency, you’ll need to work out a payment plan. Do not ignore your debt; it’s not going away. Your best course of action is to pay it off as quickly as possible so that you can clear it from your credit report so that it can’t work against you in the future. Some debt collectors are willing to work with you on a payment plan to ensure that the balance is paid in full. Make sure that you have your agreed upon plan in writing before any money changes hands. In some cases, you may even be able to reach a settlement where you pay a lump sum that is a large percentage of the total debt.

If you are truly struggling to repay the debt, seek help by contacting a credit counselor. These counselors will work with collections agencies to devise a debt management plan that enables you to pay down your outstanding bills. In truly dire financial situations, you may be tempted to file for bankruptcy. This provides a financial fresh start but can have a lasting effect on your credit score. A credit counselor can walk you through the different types of bankruptcy if it comes to that and Collections agencies have assumed the role of financial boogeymen. if your debts are overwhelming you.

Know your Rights

No one wants to learn that their accounts are in collections and most people will do whatever it takes to ensure that their debts are paid. Unfortunately, scammers will use this information to take advantage of people and get them to hand over money under the guise of being a collections agency. Here’s how to know if you’re dealing with a scammer:

• They withhold information. If receive a suspicious call, email, or letter from someone who claims they are trying to collect on a debt you owe, do some research. If they can’t prove to be who they say they are, don’t give them a penny.
• They pressure you to pay via money transfer or prepaid credit card. No legitimate collection agency will ever ask for payment via these methods.
• They threaten you. If a collection agency has legally purchased your debt, they should not threaten you in any way. They should also not call you and pretend to be the police or claim that you’ll be arrested if you don’t pay immediately.
• Requesting unnecessary personal information. Don’t ever give out information like your bank account number or your social security number.
• Calling at bizarre times. If you receive a call at 11pm from a stranger that’s claiming that you owe them money, that person is almost certainly a scammer.

Take comfort in knowing that a legitimate debt collection agency has strict conduct guidelines to adhere to. The following actions are prohibited, thanks to the Fair Debt Collection Practices Act¹ :

• Harassment
• Lying about the amount that’s owed
• Using deceptive methods to get the money
• Repetitive phone calls that are intended to annoy

Even if a bill goes to collections, you still have rights, and you should be familiar with how debt collectors are allowed to legally conduct themselves. Additionally, make yourself familiar with the statute of limitations on debt collections in your state.

Having a bill sent to collections can be stressful and embarrassing and it can hurt your credit if you don’t pay it off. The sooner you address it, the more you can minimize the damage and restore your financial freedom and credit score. To avoid having a future bill go to collections, take control of your finances with these budgeting basics.