What to do when your debt goes to collections

When a borrower stops paying a debt, the original creditor (the credit card company, lender, or hospital) usually charges the debt off after 120 to 180 days of non-payment. Charge-off is an accounting move on the creditor's books, not a forgiveness of the debt. The debt still exists.

What usually happens next: the creditor sells the debt to a third-party collection agency for a fraction of face value, often 4 to 14 cents on the dollar. The collection agency now owns the debt and tries to recover it from you. Anything they collect above their purchase price is their profit, which is why they're willing to negotiate.

This is your leverage. They'd rather get $400 on a $2,000 debt they paid $80 for than spend a year suing for the full $2,000.

The federal Fair Debt Collection Practices Act (FDCPA) sets specific rules for what third-party debt collectors can and can't do.

They cannot call you before 8 AM or after 9 PM in your time zone. They cannot call you at work after you've told them not to. They cannot use profane language, threaten violence, or imply they can have you arrested. They cannot contact your family, employer, or neighbours about the debt (with very narrow exceptions to locate you).

Within 5 days of their first contact, they must send you a written notice with the debt amount, the original creditor, and a statement of your right to dispute. You have 30 days from that notice to send a written dispute. Once you dispute, they must pause collection until they verify the debt with the original creditor.

They cannot sue you on a debt past the statute of limitations (which varies by state, typically 3 to 6 years from your last payment). Making a partial payment can restart the clock in some states, so don't make small good-faith payments without a strategy.

When a collector calls, the single most important thing is to not acknowledge the debt or commit to anything verbally. Ask them to send you everything in writing.

Script: 'I want to handle this responsibly. Please send me a written validation of this debt with the original creditor, the original amount, and the chain of ownership. I'll respond after I receive it.'

Then hang up. Don't say 'yes I owe this' or 'I'll send something next week.' Both can be used against you legally if the case ever goes to court.

When the written validation arrives, you have three options: dispute it, negotiate a settlement, or pay in full. Which one depends on whether the debt is real, how close it is to the statute of limitations, and how much you can afford.

Most third-party collectors will settle for 20 to 50 cents on the dollar. Original creditors (your original credit card company, if the debt hasn't been sold) typically settle at 40 to 60 cents.

Opening move: offer 20% of the balance, payable in a lump sum, in exchange for a 'pay for delete' letter (their agreement to remove the collection from your credit report). They'll usually counter at 50% or higher. Settle around 35-40%.

Get everything in writing before you pay. Specifically: the settlement amount, the agreement that the remaining balance is considered satisfied, and the agreement to update the credit-bureau reporting (either delete the account or mark it 'paid in full' rather than 'settled for less'). 'Pay for delete' is harder to get than it used to be (credit-reporting rules tightened) but worth asking for.

Never pay before you have a signed settlement letter. Once paid, the leverage to negotiate the reporting is gone.

A collection on your credit report can drop your FICO score by 60 to 100 points, depending on your starting point. The good news: newer FICO models (FICO 9, FICO 10) ignore paid collections entirely, and medical collections that have been paid don't count even on older models.

Rebuild path: a secured credit card with a $300 deposit, used for one or two small monthly charges paid in full, builds positive history. After 12 months of on-time payments, your score typically recovers to within 30 points of where it was before the collection.

The collection itself stays on your report for 7 years from the date of first delinquency on the original debt. After 7 years it falls off automatically.