Even when we strive to meet all our financial obligations, unexpected life events can get in the way. Cash flow does not always line up with our bills, especially when faced with sudden medical expenses or a drop in income. After a set period of time, lenders may send unpaid debts to a collection agency. This can be shocking and confusing at first, but there are ways to remedy the situation and get back on track. So, what happens when a bill goes to collections?
Lenders will typically hold on to your unpaid debt for 30 to 180 days before selling it off to a collection agency. This is known as a “charge-off” debt. Once received, the collection agency reports that your account has gone to collections to the three major credit bureaus, leading to a negative mark on your account and a drop in your credit score. You will then be contacted by phone and in writing regarding the details of the charge-off.
In this guide, we’ll explore what happens when a bill goes to collections as well as what to expect during the payoff process. You can still redeem your credit score by paying down your debt as quickly as possible and staying diligent with your other accounts.
What Is a Collection?
The original lenders—such as the credit card company, mortgage lender, or doctor’s office—turn to collection agencies when they no longer expect to receive your payment. Collection agencies either act as a middleman to retrieve the debt or purchase the debt from the lender for a fraction of the original amount. The lender then writes the amount off as a loss to their business and passes responsibility off to the agency.
Collection agencies purchase your debt for a smaller percentage of the original amount since they take on the risk that the money will not be repaid. This percentage varies based on a series of details, including the age and type of debt. Often, the higher the risk the debt will not be repaid, the less the agency pays.
When does a bill go to collections? A lender will typically sell the debt between 30 and60 days of delinquency, though they may not tell you that this occurred until after the transfer. Medical bills will not be transferred until they reach 180 days of delinquency due to the National Consumer Assistance Plan.
Once a lender sells the debt to a collections agency, you will receive a phone call alerting you of the change. Within five days of the initial notice, you will receive a physical letter that outlines the amount owed and how to pay or dispute the bill. Agencies do not have the right to collect fees or interest on the amount, nor are they allowed to threaten or intimidate you to pay the bill. The debt collectors can continue to pursue the amount depending on your state’s statute of limitations. The length varies between three to ten years depending on the laws of your state.
How Can a Bill in Collections Affect My Credit?
Payment history is one of the top contributing factors to your credit report, accounting for over a third of your credit score. Lenders want to be able to see that you’ve managed your finances in the past. Missed and lapsed payments that have gone to collections could be seen as a sign of financial instability. The effect on your credit score comes down to how late the payment is, the amount due and the type of debt.
When unpaid bills are sold to collection agencies, the negative mark can stay on your credit score for up to seven years. The starting date is determined by the last time the bill was brought current. For example, notes on defaulted bills can remain on your credit for seven years after the last time you made a payment on the loan in question.
It is important to look at your credit report on occasion to ensure these negative marks do not appear by accident. If the collections agency or lender made a mistake in reporting the information, you can dispute the debt to have your report updated or the note removed.
As we mentioned earlier, the National Consumer Assistance Plan keeps medical debt from appearing on your credit report before 180 days of delinquency. This allows patients to negotiate with their doctors and insurance companies, many of which will offer payment plans when the bill is too high to pay in full.
How to Handle Accounts in Collections
Understanding what happens when your debt goes to collections can be daunting. Remember that you must receive all the details in writing within five days of first receiving notice. Once this arrives, verify the details with your own payment history and accounts. Review the Fair Debt Collections Practice Act if you’re concerned your collection agency is overstepping their bounds. Collectors are not, for example, allowed to intimidate you or call at unreasonable hours.
If all information is confirmed, you can approach the payoff in several ways. Set up a payment plan with your collection agency by determining a practical timeline with your own finances. If you can afford $50 a month for the next year, speak to your agency about this option and request any agreement in writing before proceeding. Avoid giving your bank account number or setting up automatic debits with the collection agency and clearly state how you plan to pay off the amount.
Dispute any inconsistencies within 30 days of collections notification. Collections does not have the right to list the debt on your credit report during the investigation. The Consumer Financial Protection Bureau has prepared sample letters for disputing or requesting clarification from a collection agency.
Once you’ve done your due diligence of requesting a payment plan and paying down the debt to your ability, the statute of limitations laid out by your state determines how long a collection agency can pursue you. A collection agency can sue you for unpaid debt, but you may have a case to have the lawsuit dismissed with legal assistance if the debt is outside the statute of limitations.
If a bill goes to collections, you do have options. Keep yourself informed about your rights as you work with collections agencies and be sure to request all agreements in writing. You can also track your credit as you make a plan for paying down your debt. This allows you to regain control after a temporary moment of financial instability.