FAQ: Debt in Collections

Dealing with debt is no easy matter. If you’re facing the prospect of collections due to unpaid debt, it’s important to understand what’s happening, what to expect, and what you should do next.

What does it mean to be in collections?

When the money you owe goes unpaid for a significant period of time, the creditor of this money – for example a credit card company, a bank, or a medical institution – may take action to recoup their losses. This action can include bringing in a debt collector to try and collect your overdue bills. On the other hand, an external debt collection agency may also purchase your debt from the original creditor. In either case, the debt collector will work to recoup the unpaid money; taking steps such as calling you, sending letters, and reporting your debt to a credit bureau.

What’s the impact on your credit score?

Debt collectors are not required to report your collection account to a credit bureau, but if they do choose to make a report, this will lead to a drop in your credit score. You can expect a drop of around 100 points, depending on the specifics of your situation. Most credit scoring models don’t take into account the amount of money owed; so whether it's $50 or $500, the effect on your credit score will be the same.

If your current credit score is fairly high – in the 700s, say – having a collection account on your credit report can lead to a significant impact on your credit score. Moreover, the effects don’t automatically disappear once your debt is paid. Collection accounts typically remain on your credit report for seven years. The good news is that if you do pay off your debt before the seven years is up, you can usually provide written documentation to a credit bureau and ask them to remove the collections account from your credit report.

Can your collection account be sent to multiple agencies?

Depending on the situation, your debt may change hands multiple times. Your original creditor – a credit card company, for example – may sell your debt to an external collections agency. Later, if that collections agency was unsuccessful in recouping the money owed, the debt will go back to the credit card company, which might then opt to re-sell the debt to a different agency.

No matter how many times your debt changes hands, only one collections account should be placed on your credit report at any given time. If you discover multiple instances of collections reporting for the same debt, get in touch with one of the three credit bureaus (TransUnion, Equifax, or Experian) to explain that duplicate reporting has occurred and request that it be deleted.

What should you do if you have accounts in collections?

It’s no fun to be hounded by a collections agency. Be aware that federal law prohibits a debt collector from abusing or harassing you, or engaging in any kind of deceptive behavior. Don’t give out personal information, such as your Social Security Number or bank account details, to anyone claiming to be from a debt collection agency. A good online resource is the Federal Trade Commission’s website, which provides a copy of the Fair Debt Collection Practices Act. This law outlines what debt collectors can and cannot do in their pursuit of unpaid debts.

If you believe that the debt is not legitimate, you can dispute it. Get in touch with the debt collection agency or your original creditor within 30 days from the time when you receive the first collection notice, and be ready to show written proof of why you should not be responsible for the debt – for example, if you’ve already paid it off or if you were the victim of a scam.

If the debt is legitimate, your best bet is to pay it off as soon as possible. Having an account in collections can lead to a court summons or a lawsuit. While paying down debt can be easier said than done, there are resources to help. Check out consumer information from the Federal Trade Commission on coping with debt, including budgeting ideas, support on contacting creditors, and how to find reputable debt relief services.