You’re behind on your debt payments — big time — and you know that you should pay what you owe, and that if you don’t, your credit score will tank, and your credit report will signal to lenders that you’re a risky bet. You know that from here on out, it’ll be harder (or maybe impossible) to get a loan on, well, anything. You also know that ethically you should pay off all of your debts.
But what if you have debt or debts that have gone to a collection agency? In other words, you cannot pay off the debts anytime soon, and the phone is constantly ringing, with debt collectors on the other end? What will actually happen?
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
If you’re worried, what follows may ease your mind — or not.
There is no universal happy or sad ending for your debt. In other words, it’s impossible to say exactly what will happen with anybody’s specific debt. Every debt is different.
If your debt has just gone to collections, or is about to, but you are able to pay it back, then now is the time to try to get it paid off, says Michelle Dunn, a Plymouth, New Hampshire-based debt collections consultant.
Consider whether you’re concerned with damaging your credit report — maybe your credit score is already in the basement, like the 500s instead of the 700s, and you know it’s going to be years before you can look like a good risk to lenders again. In that case, Dunn says, “you can just let it go, and never pay and it will show up on your credit report as a negative.”
She adds: “Some folks aren’t worried about their credit and do this all the time.”
[See: 12 Simple Ways to Raise Your Credit Score.]
Assuming you can’t pay what you owe, your creditor will sell the debt to a collections company, says Jaycob Arbogast, who owns Arbogast Advisers LLC, a financial planning firm in Chico, California.
And eventually that firm may sell your debt once again, Arbogast says.
“Every time this happens, the new collection agency is probably buying the debts for less and less because it’s getting increasingly more difficult to collect them. A debtor could make an argument that if the debt has been sold over and over again, the current collections agency might not even have the authority to collect on the account,” Arbogast says.
All of this may sound like you could be off the hook, with the exception of seeing your credit score and credit history in tatters, but as Dunn says, you can be taken to court for unpaid debts; if you’re found guilty, your wages could be garnished or your assets could be seized.
Generally, experts say, your odds of being sued depend on how much you owe and whether it’s worth the expense for a creditor to come after you. But, really, there’s no way to tell if you’re at risk for a lawsuit.
“Some creditors never bother to sue, so if someone really has few financial resources, I recommend that they wait until they are sued to settle an account,” says Sarah Poriss, an attorney based in Hartford, Connecticut, who specializes in financial issues, like helping people buried in credit card debt or who have fallen behind on their mortgage.
Notice Poriss says settling an account. You may not need to pay off the entire debt, she notes.
“Most creditors will accept a payment that is a portion of the unpaid balance after the account has gone unpaid for about six months,” she says.
Poriss adds that you probably won’t be able to negotiate a settlement directly with a credit card company.
“Credit card companies typically do not give anybody a discount,” she says. “But when an account is three or more months overdue, that is when the settlement offers start to come in, almost always from a third-party collector.”
At that point, Poriss says, the debt collector will often accept at least 70 percent of the balance.
“The longer the account is in collection, the lower the offer will go,” she says.
And Poriss says that the more you can pay, the steeper the discount you’ll likely get from a creditor.
“I think this is unfair because the people who have the ability to save up large amounts of money are the ones who don’t need the deals,” she says. “It’s the people who have a hard time saving their money or who earn less who need the bigger discounts.”
[See: Your Month-to-Month Guide to Savings.]
Paying off a really old debt may not be worth the trouble. If you have really old debt, and you haven’t been sued, and you just want to do the right thing, or you want to clear up your credit report history, you actually may be better off doing nothing.
For starters, most negative information falls off a credit report after seven years. But even if you feel that ethically you should pay an ancient debt, despite it being, say, 11 years old, you may want to rethink that plan.
“Sometimes it makes sense not to pay a debt that’s outside the statute of limitations. If it’s traded hands many times, you may not even know who legitimately owes the debt at this point or whether the amount is correct,” says Gerri Detweiler, a personal finance writer in Sarasota, Florida, and the author of a free Amazon Kindle book, “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.”
Then Detweiler makes a point that’s pretty scary: “Making a payment can start the clock ticking again,” she says.
So while you might have an old debt that’s outside your state’s statute of limitations for being sued, you might try to pay it off and learn that it’s been padded with interest and fees, Detweiler says. And if you can’t pay off the entire debt, it’s possible you could be opened up to a lawsuit.
Poriss agrees that paying off an old debt can be risky. “If an account is close to aging off a credit report, I tell [my clients] to wait to pay that last, if at all,” she says.
If you are paying off debts in collections, the general rule of thumb, according to Poriss, is to try and pay off the newest fallen-behind debts first, and then (maybe) work your way up to the oldest.
“Of course, none of this is advice you’ll hear Suze Orman give,” Poriss says, referring to the famed personal finance guru. “She can’t. It’s too controversial.”
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What Happens When Your Debt Goes to a Collector? originally appeared on usnews.com
