THE BROKEN WALLET

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Dealing with a debt in collections and a debt collector isn’t fun. Collectors can be persistent and use scary language, so if you’re contacted by one out the blue you might think: Let me pay these people and get them off my back.

But this isn’t always the right move…let me explain. 

Unbeknownst to some people, under certain circumstances paying a debt in collections – or more specifically an old debt in collections – might do more harm than good. 

In this article I’m breaking down when you shouldn’t pay, and when you should pay – focusing first on the “when you shouldn’t part” because that’s the piece of the puzzle that some people don’t understand. But first…

how does a debt in collections work?!?!

If you have a recently past due credit card bill, utility bill, or medical bill, your original creditor will likely contract a debt collection agency to collect these past due funds. And if they’re able to collect, the debt collection agency earns a commission.

However, if you don’t pay the amount, your original creditor eventually counts it as a loss, writes off the debt, stops collection attempts, and then moves on. This is the first phase of a collections.

But at some point down the line—and this can be many years later—a debt buyer might come into the picture.

A debt buyer is a debt collector that buys old debts from an original creditor. They usually purchase these debts at a low price, and then attempt to collect – to earn a profit. 

The problem with debt buyers is that some have a practice of buying and reviving very old debts, aka zombie debts. Some of these debts can be as old as 10 or even 20 years.

Debt buyers seek payment, even though these debts are often past the statute of limitations for collection in your state. And despite the fact that you’ve already paid the price for “not paying.” These past due accounts can be so old that they’ve already been reported on your credit report – and sometimes, they’re already fallen off.

So let’s say it’s 2021 and you’re contacted about a debt you didn’t pay in 2004. If the debt resurfaces, you might decide to pay the collector to avoid repercussions.

But this isn’t how you handle an old debt that resurfaces. Here’s what to do instead…

1. Don’t verbally acknowledge the debt

Whether you’re contacted via phone or letter, never confirm or say that you owe the money. This is where a lot of people make the mistake.

Understand that debt has a statute of limitation, which can range from three to 10 years in most states. This is the length of time a debt collector has to recover an unpaid balance or take legal action to recover.

Confirming or acknowledging an old debt restarts the statute of limitations, in which case, the collector can now legally sue to collect – and that’s not good.

Now yes, even if you’re past the statute of limitations this is still your debt. And some might argue that regardless of the debt’s age, paying the past due balance is the right thing to do. However, it’s not that simple.

Paying an old debt doesn’t benefit your original creditor. Remember, they’ve written off the debt and moved on. In other words, your original creditor isn’t thinking about this account.

The debt buyer, on the other hand, is trying to profit off of your past mistakes. These are mistakes that you’ve already paid for.

You’ve already dealt with the consequences of “not paying” the balance. Again, this delinquency or collection has already been reported on your credit. Your credit score already took a hit, and if the debt is older than seven years, it’s no longer on your credit report.

So basically, you did the crime and you did the time. At this point, it’s okay to leave the debt in the past.

2. Ask the collection agency to send proof that you owe the balance

If you don’t know whether a debt is past the statute of limitations, ask the debt buyer for proof. Send a written request via certified mail, so you’ll have a return receipt (Google has several sample letters).

If it is past the statute of limitations, asking for proof is often enough to get a debt buyer off your back. They know they can’t take legal action, so they won’t waste their time.

It’s also important that you don’t send a payment, or even arrange to send a payment until “after” you receive proof.

Just like giving a verbal confirmation, making a payment also restarts the statute of limitations.

3. Check your credit report

To be clear, an old debt that’s past the statute of limitations can still appear on your credit report. This is because the credit reporting timeframe is completely different. So an unpaid debt will remain on your report for about seven years, regardless of whether it’s time-barred.

However, always check your credit to make sure a debt buyer hasn’t re-aged a debt. This is an illegal practice that involves the collector reporting an old past due amount as new again after buying it. You can take legal action if this happens.

What else to know about paying a debt in collections?

Now, some debt buyers do purchase relatively newer debts, so your debt might be within the statute of limitations. In this case, benefits of paying include:

• you can avoid a lawsuit
• you avoid additional interest
• the debt will be marked as paid on your credit report (giving you a few brownie points when applying for other financing)

If you decide to pay, always send a check, a money order, or a cashier’s check. DO NOT AUTHORIZE an electronic debit from your bank account.

Some collectors are shady. So even though you arrange to break up the payments over several months, the collector might debit your account for the entire balance once you authorize an electronic payment.

Keep in mind that paying a debt in collections doesn’t always improve your credit score. It depends on the credit scoring model. So while newer credit scoring models ignore collections that have a zero balance, older scoring models don’t. In which case, your score will likely remain the same after paying a debt in collections.