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It can happen a million ways.
Maybe you lost your job and had to choose a utility charge to ignore.
Or maybe you’ve developed a serious health condition and now you’re stuck with a whopping
medical bill.
Or maybe...you just forgot to change your address and a bill went to the wrong place!
At some point in your life, you might find yourself having descended to another world
known as debt collections.
And you wouldn’t be alone down there.
In 2019, the CFPB reported that more than 1 in 4 Americans have a debt that’s currently
in third party collections.
But there are actually different levels to this world with different opponents and obstacles
to face.
They each require a different set of strategies to make it through with your dignity and finances
intact.
So today we’re going to be your personal guides to the 4 levels of debt collection.
This whole situation probably began when you passed the 30 days late mark on paying a debt
or a bill.
At which point they probably sent you a notification which you may have ignored or missed.
Welcome, you’ve now entered the first level of the debt collections process.
Technically, your lender can report this late payment to the credit bureau right after you
pass the 30 day mark, but many will continue to give you grace for an extra 30 days.
This is a critical juncture where you have the power to stop your descent.
Believe it or not, your lender WANTS to have a good relationship with you.
Fighting you by putting your debt further down the levels of collections is costly,
so being proactive and up front with them is the best way to go.
Ideally, the moment it becomes clear you can’t pay a bill when it’s due, call them, explain
the situation.
You might be able to get on a plan and prevent yourself from sinking lower.
Once you pass the 60 day mark, things start to heat up.
You might get one of those notifications on your phone from a credit-tracking service
telling you your credit score dropped by as much as 100 points!
That’s also when you’ll start getting calls and more letters trying to collect the
payment.
Let’s think of this as level 1.5 because during this time, you’re most likely dealing
with the original creditor and while your credit may have taken a hit there’s still
a very high chance you can negotiate directly with them.
Once you get to the point where the debt is 90 to 180 days late, you have crossed the
River Styx and are solidly in the second ring of collections hell.
The original lender has written you off as a lost cause and “charged off” your account.
If it hasn’t already, your credit score is going to tank and you’ll probably start
getting some aggressive phone calls from new people.
This is because many lenders will bring in a third-party “Collections Agency” acting
as a middle man.
Their aim is to get you to pay as much as possible as fast as possible.
It’s not uncommon for the person on the phone to earn a commission between 25% - 45%
of the amount you pay, hence the urgency you might sense in their voice.
But remember, it’s not too late to negotiate your balance down!
Experts say it’s not uncommon to end up settling for 30 - 70% of the original balance.
So start your negotiations with a small amount, and see how flexible they are.
Also, here’s a pro-tip, call them at the end of the month.
Most collectors work on monthly quotas.
And they may be more amenable to a deeper discount as the end of the month approaches.
But don’t make them any offers until you have received a “debt validation letter”.
Collectors are required to send these within 5 days of initially contacting you, and it
will detail what the debt is and how much you owe.
Make sure to check this against your records -- you don’t want to pay a debt that isn’t
yours or to a company that can’t prove they actually own it.
You also don’t have to go through this process alone.
Once you’re past that first level of collections, reaching out to a non-profit debt-counselor
can be an incredibly helpful move, especially if you have lates with multiple lenders.
These situations can get very tricky and the rules can change depending on your specific
situation.
It might not even cost you anything.
All agencies certified by the National Foundation for Credit Counseling will offer free credit
counseling sessions.
After the 180 day mark, the bank, medical provider, or credit card company may give
up trying to collect through the collections agency.
Phew!
You’re off the hook now, right?
Probably not.
Instead of writing off your debt as a total loss, they will often SELL your debt to a
“Debt Buyer”, hoping to make a little of their money back.
This means you’ve arrived at the third and often final level: the realm of debt-buyers.
These companies will bid to buy bundles of “bad-debts” at a steep discount.
For example, if you had a $1,000 debt that was sold to a debt-buyer, odds are they only
paid $20 or $30 for it.
Debt-buyers only expect to collect 3-6% of the balances they own, so keep that in mind
as you negotiate.
Again, low-ball first and see where it gets you.
And be sure to not give them personal information up front; let them tell you what they have
on you.
This can protect you against shady collectors and con artists.
You also need to be careful about reviving an old debt that’s past the statute of limitations!
Collectors have a limited window of time in which to sue you for debts, depending on the state.
Here in Texas, it’s only 4 years--from the date of your last payment!
So if a collector can convince you to make a payment on a debt that’s 3 years and 11
months old, the clock resets!
So I know what you must be thinking...wow!
I can just wait it out a few years and my debt will go away!
And yes, some old debts will fall off your credit report after 7 years.
But, remember, your credit score and history are constantly being checked by utilities,
rentals companies and even employers.
So unless you plan on not making a single move in living or employment situation for
7 whole years, you should attempt to deal with it.
Debt buyers can often be the toughest and most aggressive in their communication.
Be sure to review the Fair Debt Collection Practices Act so you know what they are and
aren’t allowed to do.
Calling you late at night, contacting family members, or threatening you with arrest are
all strictly forbidden.
Debtors prison is not a thing anymore.
You cannot be thrown in jail for a debt.
And if you ask them to stop calling you at work, they are supposed to respect that request.
If a collector is violating these rules, you are entitled to submit a complaint to the
CFPB website and your state’s attorney general’s office.
Sometimes though, instead of ending up with a debt buyer, the original creditor can choose
to take you to court.
Since they’ll have to pay an attorney, they’re unlikely to do this over small balances.
But if you ever do find yourself on the receiving end of a summons, do not ignore it.
Not showing up to court means that the other side wins automatically and will have the
right to do things like garnish your wages or seize assets.
At this point, it’s best to seek professional legal advice.There are organizations that
will provide legal aid to debtors for little to no cost.
Again, speaking with a local debt counselor is a good place to start.
As you can see, the landscape of collections changes depending on the level you find yourself in.
So it’s important to adjust your tactics accordingly.
And remember, the lower you go, the more likely collectors will benefit from preying on feelings
of shame and confusion.
Don’t give them the upper hand by losing your temper, playing loose with facts or being
afraid to ask for help.
That way you can beat the heat and claw your way back to the surface.
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Have you ever dealt with a debt in collections?
Tell us about it in the comments!