Whether it’s because of unexpected expenses, loss of job, or just a bad stretch of luck, sometimes we find our personal finances in dire straits, we fall behind on paying bills, and, eventually, land in collections. But what does that mean for your credit score, how should you handle payments and how can you protect yourself from scam collectors? We’re here to help you navigate this tricky process. 

What Are Collection Agencies? 

If you are defaulting on your payments to a creditor for a certain period of time (most commonly 120 to 180 days), they may hire a third-party collection agency to secure a payment from you. Credit card debt, mortgages, medical bills, auto loans and student loans are a few types of debt that can be passed on to a debt collection agency.

Collection agencies have been portrayed in TV and movies as scary, harassing figures that call you incessantly or show up at your home or work. However, in reality, these companies are regulated by the government, and therefore must follow rules for respectful engagement and maintaining your personal information’s privacy. With all the fear and confusion that surrounds collection agencies, scammers have taken to using fake collections as a cover to commit fraud. A little bit of knowledge is the best defense, so keep reading to learn what to expect from the real agencies and how to spot a scam. 

What to Expect

First of all, you have to know that there is a federal law that protects you against misconduct from any debt collector: the Fair Debt Collection Practices Act. Here are some of the basic protocols they have to follow according to the law:

  • Formal written notice — The agency must send you a written notice within five days of contacting you for the first time, stating how much you owe, the name of the collector, and steps required to follow if you don’t think that debt is actually yours.
  • Time and place — Debt collectors can’t contact you before 8 a.m. or after 9 p.m. unless you have previously accepted to do so. They also can’t contact you at work if your employer doesn’t allow its employees to take personal calls.
  • No harassment or abuse can be allowed — Debt collectors can’t threaten you with physical violence, use obscene language or lie to you about how much you owe or your federal rights.
  • Attorney representation — If you have decided to be represented by an attorney and the debt collector knows this fact, they must communicate with your attorney and not you personally.
  • Statute of Limitations — There is a limit on the time when a collection agency can take legal action against you for an unpaid debt. The limit changes from state to state, but usually is between 3-5 years (it can be up to 10 years in some states). It’s important to understand that this has nothing to do with how long the debt will remain on your credit report, it is simply how long the agency has to pursue legal action before the debt is marked as “time-barred.”

It’s very important to know that debt collectors are absolutely not allowed to disclose any information or details regarding your debt with anyone but you or a representative you have appointed personally. If a collection agency contacts your friends, family or co-workers, it can only be to retrieve your contact information. They can also only contact each person once and can’t say they are looking to collect on a debt. 

Should I pay my debt to a collection agency?

First and foremost, check if you actually owe debt. Errors happen and sometimes wrong information can get reported to credit bureaus. Check your most recent credit report and make sure everything is correct. 

If you do owe money, you have several options. But before you do anything, check your budget and figure out how much you can afford to pay. Having this number in mind will let you decide which plan is best for you. 

Lump sum payment: This is where you pay off your debt all at once. It’s often the fastest and most cost effective way to handle the situation. By offering to pay everything in one lump sum, you can often negotiate a lower price with the collection agency. Collection agencies often buy your debt for pennies on the dollar, which means you can offer them between 30% to 80% of what you owe and they may accept. Keep in mind that if you negotiate a lower sum, you may not see as big of a gain on your credit score. 

Installments: If you have a large debt you can’t afford to pay off at once, spreading it out over monthly payments might be your best solution. Be warned: Missing these payments can restart the statute of limitations on debts and restart how long it can negatively impact your credit score. 

When it comes to credit scores, there are several factors that determine how big of an impact paying off the debt will have. Old debts have less weight on your scores, while newer debts have more influence. Also if you have multiple debts in collection, paying off a single account may not move the needle much. 

Am I being scammed by a fake debt collector?

If you think you might have been contacted by a fake debt collector, there are some signs you can see that will help you differentiate between a legitimate debt collector and a fraudster, according to the Consumer Protection Bureau:

They don’t give you enough information. Debt collectors must give you all the information you need to verify a debt. They must introduce themselves, mention the company they work for and the company that you owe and they are collecting on behalf of. This information must be completely clear and disclosed right away as soon as they contact you.

Ask you to pay via prepaid card or money transfer. These payment methods are harder to track, so fraudsters tend to push their victims to use them.

They use a threatening approach. If they are threatening you or your family and friends with the use of physical violence, jail time or falsely claiming to be part of a law enforcement institution, it is fraud or illegal conduct, and you can call the police to report it.

They try to get sensitive personal information. Never provide sensitive information like your Social Security number or bank account information, especially if the collections agent hasn’t identified properly or run the verification process.

They pick odd times to call. If you are being contacted before 8 a.m. or after 9 p.m., it’s most likely a scam. Legitimate collectors aren’t allowed to call during those times, while foreign fraudsters are often in a distant time zone. 

Final thoughts

If a bill ends up in collections, it can be stressful. The best way out is figure out how you can reliably plan to pay off the debt. But it’s important to remember it’s not the end of the world. Generally, debts stay on your credit report for approximately seven years and their impact diminishes over time. It’s never too late to develop financially healthy habits. 

By far the best way to deal with collections is to avoid it all together. An Emergency Fund is always helpful in dealing with those unexpected expenses. You may have also seen headlines about rising interest rates. If you have outstanding debt currently, it’s important to pay that off sooner rather than later, as the government is expected to continue to raise rates, which will make paying it off more expensive and difficult.

Remember that the experts at The Exchange Blog are always looking for ways to help you protect your personal finances, and we will continue to do the homework so you can have quality information that you can actually use.