What Happens If a Bill Goes to Collections

So, you’ve received a notification that one of your bills has been sent to collections. You’re not 100% sure of what that means to you—or your credit—but it doesn’t sound good. The truth is, collections happen. And while learning that one of your bills is in collections may feel alarming, it truly is manageable.

When a bill goes to collections, it means that it's gone into the hands of someone (or a team of someones) whose job it is to try and collect that debt. There are a variety of ways they could go about doing that—and just as many ways you can manage the situation.

There may be more than 7,000 collection agencies in the U.S., but they all must follow the same set of strict guidelines. That’s because, as the consumer, you’re protected by federal law.

Here, we’ll cover the types of bills most commonly sent to collections, tell you what happens once a bill is in collections, explain your legal rights, and offer the common-sense steps you can take to deal with the matter.

Types of Bills That Can Go to Collections

Bills that could go to collections include:

• Medical bills

• Credit card debt

• Student loans

• Rent payments

• Personal loans

• Utility bills

• Insurance premiums

• Telecommunications bills (such as mobile phone, cable TV, and internet services)

• Personal loans

• Bank fees

• Membership fees

• Tax debt

Most creditors prefer to avoid the hassle and expense of collections and will send you multiple late payment notices before moving your debt to collections. How late a payment must be before a debt is sent to collections varies by the type of debt. However, once a credit card payment is 120 to 180 days past due, it’s typically moved to collections.

While many kinds of debt can be sent to collections, our focus here is on unsecured debt. As the name suggests, unsecured debt is debt that requires no collateral. For example, when you buy a home, it’s a secured debt because your property acts as collateral that backs up the loan. When you purchase a car, it’s also secured because the vehicle is the collateral that a lender can repossess and sell if you miss payments.

With unsecured debt, there’s no collateral to repossess. Still, as we’ll cover in a moment, your best bet is always to deal with overdue debt as quickly as possible.

What Happens When a Bill Goes to Collections

If a creditor has an in-house collections department, that’s where the debt will typically be handled, and that’s the department that will contact you. If a creditor doesn’t have its own collections department, it will likely sell the debt to a third-party debt collector or debt buyer for pennies on the dollar. 

Here’s what you can expect to happen once a bill goes to collections:

• Communication: The debt collector (whether it’s in-house or a third party) will reach out via phone calls, letters, and sometimes emails.

• Negotiation: The debt collector may offer a payment plan or a settlement to resolve the debt.

• Credit report: A collection account may appear on your credit report as a separate entry for future potential creditors to see. While it can stay on your report for up to seven years, the entry has less impact on credit decisions as time passes and you continue to pay bills on time.

• Legal action: If a debt remains unpaid, the collection agent could pursue legal action, and a court could issue a judgment authorizing the collection agency to garnish wages or levy bank accounts. As a reminder, there are steps you can take to avoid legal action.

• You'll be covered by the Fair Debt Collection Practices Act (FDCPA): The FDCPA is federal law that protects you from harassment and outlines the rights you have regarding debt collections. While debt collectors are legally allowed to contact you, there are limits on how and when.

Your Rights When Dealing with Debt Collectors

The guidelines established through the FDCPA are powerful tools in your arsenal, protecting you from harassment from debt collectors. Here’s how you’re protected:

• Mandatory written notice: A debt collector must send you written notice within five days of first contacting you. This notice must include the amount the collector says you owe, the name of the original creditor, and your rights in the situation.

• Verification: You have the right to request verification that the debt is yours and that the amount owed is accurate.

• Right to dispute: If you believe the debt collector’s information is incorrect, you can dispute the debt within 30 days of receiving the written notice. Until the collector can verify you owe the money, they must cease all debt collection activities involving you.

• Time of day: A debt collector may not contact you before 8 a.m. or after 9 p.m. unless you agree and permit them.

• Place restrictions: A debt collector can't contact you at your place of employment if you’ve told them not to.

• Harassment: Legally, a collector can't threaten violence, use profane language, or call you repeatedly to annoy you.

• Your privacy: A debt collector cannot disclose your debt to a third party without your permission. This includes family, friends, and co-workers, but typically not your spouse.

• Contact: You have the right to request that the debt collector cease contact. While they must comply with your written request, they could still pursue legal action if they choose to.

• Legal counsel: While FDCPA provides consumer protections, a qualified attorney is best suited to address specific concerns.

How Collections Affect Your Credit

Collections can remain on your credit report for up to seven years from the date of the first missed payment, although time tends to lessen their impact. Typically, you can expect a collection account to lower your credit score, though how much it will drop depends primarily on the overall state of your credit.

In addition, how much is reported to credit bureaus varies based on the laws of the state in which you live. For example, Illinois law bars credit agencies from reporting medical debt on credit reports, while many other states do not.

In a nutshell, while collections could negatively affect your credit report, how much depends on many factors. You can order a free copy of each of your credit reports (from Experian, TransUnion, and Equifax) from AnnualCreditReport.com. Carefully go over each report to find (and dispute) any errors, and to see if any collections accounts have been reported.

Steps to Take if a Bill Goes to Collections

The first thing to do after learning that an account has been sent to collections is to take a deep breath. Next, you’ll want to take the following steps.

Verify the debt is yours  

Request a debt validation letter to confirm that the debt collector’s details match yours, including the amount of the debt and the original creditor. Compare the details in the letter to your records and your credit reports to ensure everyone is on the same page. If there’s a mistake in the letter, dispute it in writing with the collection agency. If there’s a mistake on one (or more) of your credit reports, dispute it with the credit reporting agency.

Evaluate your options  

You may have several strategies going forward:

• Look at the age of the debt in question: Even if the debt is yours, each state sets a specific time limit for creditors to take legal action. That’s called the statute of limitations. Once that time has passed, a creditor no longer has the right to sue you over that debt.

• Review your budget: Before speaking with a creditor, work your monthly budget to determine how much you can realistically afford to pay toward the debt.

• Decide on the best way to negotiate: Consider whether paying the debt in full, negotiating a payment plan, or settling for less than you owe is most feasible.

Communicate with the debt collector 

No matter what, keep notes of all conversations with the debt collectors, including dates, names, and details discussed. If you reach a payment agreement, get it in writing from the debt collector before making any payments.

Ways to Resolve Debt in Collections

Here are some of the most common ways to resolve debt that's gone to collections.

Pay in full 

If you can afford to pay the balance in full, doing so should not only clear your debt but also stop all collection activity. It won't remove the negative item from your credit reports, however, unless you also negotiate with the debt collector to do so.

Payment plan 

Some debt collectors offer structured payment arrangements that better fit your financial situation. You could work out a payment plan that works with your budget to pay off your debt. You may also be able to negotiate for the debt collector to remove the negative item from your credit reports when paid in full.

Negotiated settlement

It’s possible that you could settle the debt by offering the debt collector less than the full balance. Let’s say you owe $5,000 and can come up with $2,000. Offer the lump sum of $2,000 in return for the debt collector forgiving the remainder of the debt. 

Keep in mind, though, that settling a debt for less than owed can have tax implications. For example, you may end up paying taxes on the amount of debt the company forgave. Consult with a tax professional for advice on the potential tax consequences.

Next Steps After a Bill Goes to Collections

When the collections letter hits your mailbox, you need to decide how to handle it. You could try to pay it in full, work out a payment plan, or negotiate a settlement.

If you’ve determined that you’re going to try to resolve the debt, decide if you’re going to go it alone. You could negotiate directly with a debt collector—or work with a professional debt relief company that may negotiate on your behalf in return for a fee. While debt relief companies are professionals and accustomed to negotiating deals that benefit consumers, the fact that debt collectors don’t have to cooperate means results aren’t guaranteed.

The point is, you have options, and having a bill sent to a debt collector is not the end of the world (or your finances). It may be unsettling, but it’s something you can get through. If you’d like help to work through the best options for you, feel free to contact Freedom Debt Relief.