Three ways to pay off a debt in collections
Before making a payment on a debt, determine聽whether it鈥檚 past the statue of limitations聽so you can handle it properly. If it鈥檚 not, there are three main options to聽pay off a聽debt in collections
Before making a payment on a debt, determine聽whether it鈥檚 past the statue of limitations聽so you can handle it properly. If it鈥檚 not, there are three main options to聽pay off a聽debt in collections
A聽debt in collections聽will crimp your credit and leave you open to pestering phone calls from debt collectors. Paying it off can get debt collectors off your back and put聽you on the path to rebuilding your credit and reclaiming your finances.
Before you make a payment on a debt, first determine聽whether it鈥檚 past the聽statute of limitations聽so you can handle it properly. If it鈥檚 not, you have three main options to聽pay off a聽debt in collections:
- Create a payment plan.
- Pay it off in one lump sum.
- Settle the debt for less than you owe.
Here鈥檚 a breakdown of each tactic, including聽pros and cons. No matter which route you take, make sure you get the agreement between you and the聽debt collector in writing to ensure both parties stick聽to the plan.
Create a payment plan
PROS |
CONS |
|---|---|
You can create a payment amount and schedule that works for your budget. |
Missing a payment can derail the plan. |
Paying off your debt will help your credit report and credit score. |
If your payment amount is unrealistic, a small emergency could blow up your budget. |
Creating a payment plan lets聽you set a payment schedule and amount that works for your budget.
Comb through your finances to see how much you can afford to pay each聽week or month, whether it鈥檚聽$20 or $100. Then contact the聽debt collector by phone or mail to propose the plan. If the collection agency agrees, it should send you a document outlining the deal. Make sure the terms of this agreement are correct before making a single payment.
This option can help you pay off the debt in a manageable way. It also can lead to聽the debt being marked 鈥減aid in full鈥� on your credit reports, which can offset聽some of the damage done by聽delinquent debt.
Be sure you set an amount and schedule that won鈥檛 strain your budget to the breaking point. If you miss a payment, the debt collector may abandon聽the agreement and try to sue you for payment, which can lead to聽wage garnishment.
Pay it off in one lump sum
PROS |
CONS |
|---|---|
Debt is gone in one payment. |
Can be hard to pull together the money. |
Paid-off debt helps your credit report and score. |
Diverts money from other needs. |
If you come into money through a tax refund or inheritance, or if you just聽hustle to earn the money,聽paying off the debt with聽a single payment can quickly resolve your debt collection woes.
First, make sure this fits聽your financial situation. Weigh the pros and cons of funneling money into wiping out debt聽versus the loss of money for other expenses.
Paying in full can get the debt off your back for good, but make sure you get the聽agreement in writing first. Keep this proof in case the payment isn鈥檛 recorded correctly or the debt somehow gets resold to another collector.
Settle the debt for less than you owe
PROS |
CONS |
|---|---|
You pay a lump sum that鈥檚 less than originally owed. |
Can be hard to strike a deal. |
Faster than a payment plan. |
Can look bad on credit report. |
Debt collectors might not hold up their end of the deal. |
Negotiating a settlement for a single payment of less than you originally owed can make the debt easier to pay off.聽You can do this yourself, even though many聽debt settlement companies聽will try to get you to pay them for this service.
There are risks. Ramon Khan, a former debt collector in Texas who now works in online marketing, says it鈥檚 routine for debt collectors to tell a consumer that they will take a partial payment as a settlement, only to sell the remainder of the balance to another debt collecting company.
鈥淚t can put you in a vicious cycle where you still have to pay the rest of the debt, but now there鈥檚 another company that鈥檚 calling to collect the rest of it,鈥� Khan says.
Negotiating a settlement takes persuasion and caution. Explain why you can鈥檛聽make full payment. The greater the debt 鈥� and the longer it鈥檚 been in collections 鈥� the more likely the creditor is to accept a settlement. As with any negotiation, start lower than your target. If you want to settle for 50% of what you owe, for example, try starting at 30%.
Khan advises聽being explicit about the terms of the settlement and getting everything in writing. You can start the conversation on the phone, but don鈥檛 make the payment until the debt collection company sends you a聽written聽agreement. It聽should state:
- That the agreed-upon amount is sufficient payment for the entirety of the debt.
- How the debt collector will report the debt to credit聽bureaus. It will likely report it as 鈥減artial payment鈥� rather than 鈥減aid in full,鈥� but make sure you know before you agree. A 鈥減artial payment鈥� on your credit report will crimp your credit, but it鈥檚 better than an unpaid debt.
Next steps
Any of these three options can help you pay off your debt in collections for good. If your debt is unmanageable, however, you may want to consider a聽debt relief option, such as bankruptcy or credit counseling
Once you have your debt under control, you can work on good financial habits like setting聽a budget, building an聽emergency fund聽and working to聽rebuild your credit.
Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:聽spyles@nerdwallet.com.
This story originally appeared on NerdWallet.