If an unknown debt collection shows up on your credit report, getting a credit card, mortgage loan, or auto loan can be difficult.
Some banks will deny your application.
Or if you’re approved, you may pay a higher interest rate because you pose a higher credit risk.
When you’re aware of a collections item on your credit report, you might prepare mentally for a rejection or unfavorable terms.
A surprise collection account, on the other hand, is more difficult to stomach.
Perhaps you thought you had great credit and that qualifying for financing wouldn’t be an issue.
And maybe you learned of the collections after a random credit check or after getting a debt collections letter in the mail.
Quick action on your part can rectify the situation.
But there’s a wrong way and a right way to deal with debt that appears out of nowhere.
Get Proof That You Owe the Debt
Having a collection account on your credit report or getting a debt collection letter doesn’t mean that the debt is yours.
A common debt collections error
Credit and debt errors occur often, in which case another person’s debt appears on your file. This can happen after a reporting error.
The person who actually owes the debt may have similar personal information as you, such as:
- the same name
- a similar Social Security number
- the same address
Fortunately, there are different ways to handle a debt that you don’t believe to be yours.
A collection item might be a debt that was sold by an original creditor.
Getting this debt off your record will involve contacting the debt collector or collection agency and notifying them of the error.
How to validate a debt
You can submit a request when you don’t recognize a debt if you feel the amount owed is incorrect.
It helps to confirm whether the debt collector actually owns the debt.
Send a written letter immediately via certified mail. You must request verification of a debt within 30 days from the date of the collection letter.
If you don’t respond to the letter, the collector will assume that it’s a valid debt and continue collection attempts.
If you request verification after this 30-day period, the debt collector isn’t required to respond to your request.
By law, if you ask for debt verification, the debt collection agency must address your request.
Detail to include in your letter
You’ll need to include some key information in the debt verification letter, including:
- Your name
- Return mail address
- Notice date
- Any reference number or account number on the collections letter
The letter should be simple and basic, yet clearly state your request for verification of the debt.
The debt collector is not allowed to take additional collection action until after providing verification.
If it’s a legitimate debt, the debt collector will send information to confirm this.
But if you don’t owe the debt or if the debt collector can’t verify the debt— maybe because they don’t own it or it is past the statute of limitations—they must stop all collection attempts.
If collection attempts continue, you can send a cease-and-desist letter.
This written request informs the debt collector to stop contacting you about the debt in question.
What About the Statute of Limitations for Debt?
But what if a debt is yours? Does this mean you should acknowledge or repay the debt?
You might say yes.
It’s true that a legitimate delinquent debt may appear on your credit report and lower your credit score.
Therefore, you might strike a deal with the debt collector to clean up your credit and avoid legal action on their part.
Paying the debt might raise your credit score.
But before you agree to any payment arrangement, make sure you understand the statute of limitations for debt in your state.
Basically, the statute of limitations for debt is a time limit in which a creditor or a debt collector can sue you for repayment.
With that said:
The statute of limitation varies by state but is typically between three to seven years.
Contact your state’s Attorney General’s office for information on the statute of limitations where you live.
In many cases, an old debt is past the statute of limitations.
If you don’t pay, the debt collector can’t sue you. Even if a debt collector or collection agency makes threats of a lawsuit, they can’t legally take action.
Some debt collectors will attempt to collect a debt that’s past the statute of limitation, hoping that a debtor will acknowledge the debt at some point.
Restarting the statute of limitations
Understand, however, that acknowledging an old debt or sending in a payment for this debt will restart the statute of limitations. This then allows a debt collector to sue you for the debt.
Unfortunately, this is how a lot of people get trapped into paying an old debt.
So if you’re contacted about an old debt, don’t acknowledge it and don’t agree to a payment arrangement.
But you can ask questions about the debt, speaking in hypothetical terms.
For example, you could say: “I don’t believe I owe this debt but tell me more about it.” You can ask questions about the original creditor. And most importantly, you can ask the original date of the debt.
This is how to determine whether you’re within or outside the statute of limitations.
- If you’re still within the statute of limitations and the debt collector threatens a lawsuit, paying the debt can get the collector off your back.
- If you’re outside the statute of limitations and the collector can’t sue you, you can choose to pay or not pay the debt.
The statute of limitations has nothing to do with the debt appearing on your credit report.
An unpaid collection will remain on your credit report for up to seven years, although the impact of this collection account on your credit score will lessen over time.
How to Work With Debt Collectors
If you owe a debt and you want to address it, paying off the collection account could add points to your credit score.
But there are a few tips to know when working with debt collectors.
Don't ignore debt collectors
Ignoring a collection letter doesn’t make the debt disappear.
It could actually intensify a debt collector’s harassment, as they’ll assume the debt is valid.
Get in contact with creditors, even if you don’t owe the money.
Either pay off the debt, ask for a debt verification letter, or negotiate with the creditor.
Make monthly payments
If you owe the debt and you’re within the statute of limitations, but can’t pay the full amount, arrange a monthly payment that fits with your budget.
Offer an amount that’s lower than what you can afford. This is important because the debt collector may counteroffer with a higher payment.
Offer a debt settlement
This is when you agree to pay a lump sum that’s less than the actual amount owed to satisfy the debt.
Some debt collectors would rather get something over nothing. So they might be open to a settlement.
Let’s say you owe $6,000 and can make a lump sum payment of $4,000 within the next couple of weeks. The collection agency may accept this lump sum and stop further collection attempts.
Agree to pay the debt in full
You can also agree to pay what you owe in full. This is what the debt collector wants.
But don’t make this offer without getting something in return.
Normally, paying a collection account won’t remove it from your report. The account remains as a “paid” collections account.
Get any agreement in writing
Once you agree to payment or debt settlement, get this agreement in writing.
Ask the debt collector to send you a copy of the agreement.
Don’t make a payment until you receive it.
Debt collection calls and collection letters can be stressful.
Some debt collectors and collection agencies may phone throughout the day, and they might send letter after letter threatening legal action.
But while the process can be overwhelming, and perhaps scary, it’s important that you understand your rights.
If you know how to deal with a debt collector, you’ll avoid paying debts that you don’t owe, and you’ll avoid resetting the clock on the statute of limitations.