It’s a major fear for many people: having one of their debts get sent to a collection agency. Collection agencies are ruthless when it comes to trying to get payments for debts. Having one come after you can be a very scary experience.
If you have a credit card, you might worry that one wrong move could result in your debt being sent to a collection agency. The good news is that it’s unlikely to happen after just one missed payment. Though each lender has different policies regarding how long they’ll keep a bad debt before sending it to collection, you can usually expect it to happen after six months of missed payments.
Learn what happens before and after your debt is sent to collection. It also gives tips on how to handle it if it does happen.
What Happens After Your First Missed Payment?
Though no one wants to miss a payment, it happens to most people eventually. Whether you forgot to set up automatic payments, or just mailed the check a day late, missing one payment isn’t the end of the world. Just don’t let it become a habit, or it could get costly.
Generally, when you miss your first credit card payment, the card issuer will assess a late payment fee. Generally, this fee is a flat amount between $25 and $50, or a small percentage of the amount you were supposed to pay. However, some lenders are forgiving for people who rarely miss a payment or who have never missed one before. If you’re really concerned about late payment fees, look for a card that offers forgiveness for missed payments.
The other good news is that while there will be an impact on your credit score, it isn’t immediate. Your credit report won’t show the missed payment until the lender reports it to the credit agency. Again, some lenders are forgiving in this regard. If you make good on the payment quickly enough and it’s not a common occurrence, the late payment may not be reported.
What Happens After Your Second and Third Missed Payments?
If you miss two or three consecutive payments, things start to get bad.
You’ll be assessed late payment fees for each missed payment. This can easily run into the hundreds of dollars, piling more debt on to your existing balance.
Payments that are late for 60 or 90 days also have a significant impact on your credit score. Late payments that show up on your report are divided into categories based on how late the payment is. Obviously, the later the payment, the bigger the impact on your score.
Just one payment that is 90+ days late can cause your score to plummet. If you have a score above 750, one such late payment could drop your score by 80-100 points. That’s enough to disqualify you for many loans and majorly affect the interest rates you can get on loans you do qualify for.
What Happens After Six Months of Nonpayment?
After six months of non-payment, you’ll be contending with hundreds, possibly nearly a thousand dollars in late payment fees. That doesn’t include any interest that accrues while you’re not paying the debt.
At this point, your credit score has taken a huge hit, to the point where you’ll have a hard time taking out any new loans. It’s also at this point that the lender will consider selling your account to a collection agency.
How Do Collection Agencies Work?
Collection agencies are businesses that specialize in collecting debts that people have stopped making payments on.
When you fail to make payments on a debt for a long period of time, the lender will lose confidence that it will ever recover the money it lent to you. As a way to reduce its losses, it will sell the right to your debt to a collection agency at a steep discount.
For example, if you owe $1,000, your lender might sell your debt to a collection agency for $50.
The collection agency buys these bad debts in bulk. If it buys 100 debts worth $1,000 each at a cost of $50 each, it will have paid $5,000, but is now owed $100,000 by its new debtors. If the agency is able to convince more than five borrowers to pay their loans in full, the collection agency comes out ahead.
You can use the fact that the collection agency bought your debt for pennies on the dollar to your advantage. This will be covered late in the section on dealing with collection agencies.
What Happens When Your Account Goes to Collection?
When your lender decides to send your account to collection, it will start by closing your card account. It will then contact a collection agency and negotiate a deal to sell your debt. Once that happens, your lender gets paid and you no longer owe them any money. Instead, you owe the money to the collection agency that bought your debt.
When your debt is sent for collection, things can get confusing. It can be hard to know who really owns your debt. Many collection agencies buy and resell debts regularly, so multiple different companies could own your debt at one point or another. Keeping track of who really owns your debt is very important.
Statute of Limitations
If you have old, unpaid debt, you should be aware that there is a time limit for collection agencies to pursue payment. This is known as the statute of limitations on your debt. Once the statute of limitation is reached, debt collectors can no longer use the courts to force you to pay a debt.
The statute of limitations on debt is different depending on where you live. In some states, the time limit is as short as 3 years. Other states let collectors pursue payment for as long as 10 years.
Note that it isn’t entirely clear in many states whether laws surrounding the statute of limitations on debt applies to credit card debt specifically. For example, Kentucky has conflicting laws stating a statute of limitation of either 5 or 15 years.
Relying on the statute of limitation for your debt expiring should be a last resort. One reason for this is that just because collectors cannot come after you to get paid doesn’t mean your credit report doesn’t show the missed payments. Missed payments will stay on your report for 7 years, no matter where you live.
Don’t Reset the Debt Clock
It is possible to “reset the debt clock,” giving debt collectors a new time limit to try and collect payments. There are a few things that can reset the clock, which you may want to avoid if you’re trying to wait the debt out. You can reset the clock by:
- Making a payment
- Setting up a payment plan
- Agreeing to pay
- Acknowledging that you owe the debt
- Using the credit card to make a new purchase
- Accepting an offer to settle the debt
If you do any of these things, the statute of limitations resets. That gives collectors more time to use the courts to try to collect what they are owed.
How to Deal with Collection Agencies
If your debt does wind up with a collection agency, here are a few things to do.
If a collection agency contacts you about payment, the first thing to do is to get the collection agency’s information. Debt collectors are legally required to take steps to prove that they own your debt. Demand that the agency not contact you by phone until they have provided documents proving they own your debt. Always record information such as the name of the person calling you, the time and date of the call, and the topics discussed. Make copies of any paper documents sent to you.
Many debt collectors use unethical and manipulative practices to try and collect money, so demand that they provide proof in writing that they own your debt and refuse to speak to them on the phone until they do.
You should also be aware of laws surrounding debt collections. It is illegal for a debt collector to:
- Call you before 8 AM or after 9 PM
- Use obscene language
- Contact you at work if you’ve requested that they not
- Threaten to repossess your property
- Accuse you of a crime
If a collector does any of these things, you should report it to the authorities.
Once a collector has sent proof of what you owe, confirm that everything listed is accurate. There may be fees applied incorrectly or incorrect balances listed in the debt verification letter. Also, check the statute of limitations on the debt to make sure you don’t reset the time limit. It is legal for a collector to contact you for payment on a debt for which the statute of limitations has expired, but they have no legal recourse if you refuse to pay.
In general, avoid providing any information that you don’t need to when speaking with a debt collector. Also, don’t be afraid to contact the authorities if the debt collector is being abusive or threatening or if you feel that the debt collector might be trying to scam you.
If, after everything, the debt is proven to be legitimate, you should try to pay it off. This is where the fact that the collection agency bought your debt at a discount can benefit you.
Negotiate with the collector. Chasing down bad debts is expensive. If you owe $1,000, offer to pay a lower amount, like $500 or even $200. It’s possible that the collection agency will accept that and write off the rest of the debt. You could also come up with a payment plan to give you time to pay the debt in full.
No matter what solution you come to, get any agreement you make in writing. Make multiple copies of the agreement. That way you have proof that the debt was settled if you are ever contacted about it in the future.