What happens if you never pay collections?
Navigating the murky waters of debt can be daunting, especially when collection agencies knock on your door. At Sadek Law, a leading Philadelphia bankruptcy law firm, we’ve seen firsthand the stress and confusion our clients face when dealing with collection agencies. There are many reasons why you should never pay a collection agency, which we’ll explore in the following sections.
We’ll explain the reasons why settling debts with collection agencies might not be in your best interest. We’ll cover the implications for your financial health, potential legal repercussions, and the alternatives that could better serve your path to financial recovery. Whether you’re drowning in debt or just received your first collection notice, understanding your rights and options is the first step towards reclaiming your financial freedom.
To schedule a free consultation about your case, please call our office at 215-545-0008 today.
A charge-off is a debt that a creditor has given up trying to collect after a significant period of non-payment, such as a credit or bank account. Paying a charge-off might seem like a straightforward way to improve your credit situation. However, there are several reasons why making a payment on a charge-off may not be the best course of action.
For starters, once a debt is charged off and reported to the credit bureaus, the damage to your credit score is already done. Paying the charged-off account won’t remove the charge-off from your credit report, and it typically won’t significantly improve your credit score in the short term.
Each state has a statute of limitations on debt collection, which is the period during which a creditor can legally sue you to collect the debt. Making a payment on a charged-off debt can restart this statute of limitations, giving the creditor or a debt collection agency more time to pursue legal action against you to recover the debt.
If you’re dealing with a charge-off, it’s likely that you’re also facing other financial challenges. Allocating your limited financial resources to pay off a charge-off may not be the best use of your money, especially if you have other debts with more immediate consequences or higher interest rates.
Deciding whether to pay a collection account depends on several factors, including the validity of the debt, the statute of limitation on debt in Pennsylvania, the impact on your credit score, and other legal and financial considerations.
First, ensure the debt is valid. You have the right to request a debt validation letter from the collection agency, which provides details about the debt they claim you owe. This is crucial to avoid paying something you don’t legally owe or a debt that has already been paid or settled.
Know the statute of limitations on the debt in your state. This is the period during which a creditor or collector can legally sue you for the debt. Paying or even acknowledging the debt can reset this clock, potentially exposing you to lawsuits for a longer period.
What is the average cost of a collection agency?
There are thousands of debt collection companies out there with different pricing options. Learning about these different options, including the average cost of most collection agency fees, makes it easier to determine the best service provider for you. Depending on the size and unique needs of your business, typical choices include contingency collections or flat free programs for third party collection services.
Most collection agencies offer contingency collection plans where you only have to pay the fee when the agency recovers revenue on your behalf. The contingency rate is a percentage of the dollars recovered. Most companies charge anywhere from 20% to 50% contingency on dollars recovered. Additionally, some agencies may also charge a retainer for services in contingency collections contracts.
However, some factors about your accounts could increase the contingency rate because they result in more difficult collection scenarios:
Some collection agencies will perform collection services for a flat fee paid upfront. Usually, the services are very specific to control costs. However, the price varies and often depends on how many accounts you plan to submit under your agreement.
For instance, IC System charges a flat fee for anywhere from $9 to $14.50 per account, depending on how many accounts you want to submit. Each account receives a series of three letters in this plan, and your office receives 100% of any dollars recovered.
After the letter series under the flat fee plan, which is the first of two phases, there’s an optional contingency-based phase with more intensive collection efforts that follow.
Although most collection agencies offer either flat fees or contingency programs, some agencies combine these services creatively. Moreover, every agency is different in terms of its policies about the minimum number of accounts, minimum balance sizes, and work effort. Therefore, it’s vital that you clarify these details with an agency before signing a contract.
For instance, most businesses want credit reporting on past-due accounts, but not all agencies provide them. Among those that do, some may include credit reporting services with the cost of collection; others charge an added fee. The same is true of credit monitoring, which allows the agency to watch a consumer’s credit report for signs that indicate an ability to pay. Other services such as attorney handling and skiptracing may incur additional costs as well.
The cost for these added services is not always clear. They can change depending on the age of an account or other demographics, but they impact how much revenue you recover.
If you’re still weighing your options, remember that debt collection is a vital step to revenue recovery for the financial health of your business. IC System can help your business recover more revenue with our contingency and flat fee plans. In addition, we charge competitive rates for our empathetic and effective services, which helped us with the BBB’s Torch Award.
How much will collections settle for?
Most debts that go to collection agencies are unsecured debts, such as credit card, cell phone, utility, and medical debts. If the creditor is flexible, it might accept a settlement below the full amount to avoid spending months futilely trying to collect the whole thing.
If you have some cash to offer a payoff of the debt or want to change the payment terms so they’re more favorable to you, consider negotiating with the collector. Options for settling the debt include:
- Settling for a lump sum payment
- Repaying through a payment plan
But before you start negotiating with collectors, you need to plan and devise a strategy.
If you have money available and only a few unsecured debts, settling them for a lump sum or repaying them through a payment plan might be a good way to dig yourself out of a financial hole.
However, before you attempt to settle your unsecured debts for less than you owe, you should determine whether another option, like filing for bankruptcy, might be a better way to go.
If you have a lot of unsecured debt that you could get discharged (eliminated), bankruptcy might be a better choice. While your credit will take a major hit, it’s probably already significantly damaged by your missed debt payments.
The most common types of bankruptcy cases that individuals file are Chapter 7 and Chapter 13.
As soon as you file for bankruptcy, an automatic stay goes into place. The stay prohibits most creditors and collectors from continuing collection activity against you. The automatic stay has the power to stop harassing phone calls, lawsuits, garnishments, repossessions, and foreclosures.
If you need help analyzing your situation and options, consult a debt relief or a bankruptcy lawyer. Talking to a nonprofit credit counseling agency, such as a member of the National Foundation for Credit Counseling (NFCC), can also be helpful.
If you’re sure you want to settle your debts rather than filing bankruptcy or some other option, understand the following key points before you start negotiations with the debt collector or collection agency:
The collection agency didn’t lend you the money or extend you credit initially. A debt collector doesn’t care if you owe $250 or $2,500. It just wants to maximize its return, which might be a percentage of what it collects or whatever it can collect over the pennies on the dollar it paid for the debt.
Time is money. Each time the collection agency contacts you, whether by letter, call, email, or text, it spends money. The agency has a strong interest in getting you to pay as much as you can as fast as possible. It has less interest in collecting 100% over five years.
Review your debt priorities. It’s also important to review your debt priorities before you start negotiations. If you don’t have the cash to make a realistic lump-sum offer or to propose a payment plan, don’t even talk to.
Can you fight something that goes to collections?
You certainly can dispute it. The collector must mark the debt as disputed, and provide proof that you owe it. If you refuse to pay the debt, and tell them this, they must cease communication, except for agreeing to delete the debt, or telling you that they’re suing you.
Do banks sell debts to debt collectors?
A federally regulated financial institution may contact you about a debt you owe. This can be about your line of credit or other type of loan. When they do, you have rights with respect to how they collect the debt. This also applies to any party acting on their behalf.
Federally regulated financial institutions must inform you of:
- Any changes in the interest rate charged on your loan
- Any changes in the billing cycle or payment due date
- Any changes in the amount of your loan payments
Federally regulated financial institutions are not allowed to:
- Harass or intimidate you
- Use threatening language or behaviour
- Contact you at unreasonable hours
You can ask that they contact you only in writing or contact only your legal advisor. You must send them a written request by registered mail. In the letter, you must provide:
- Your full name and account number
- The reasons why you do not want them to contact you by phone
- The name and contact information of your legal advisor
Your federally regulated financial institution might have sold your debt to a collection agency. In that case, the laws protecting your rights are provincial or territorial, not federal.
Learn more about the provincial and territorial laws that regulate debt collection.
Learn more about dealing with a debt collector.
These rights apply when you’re dealing with a federally regulated financial institution like a bank or federal credit union.
Find out if your financial institution is federally regulated.
Learn more about how your banking rights are protected.
How do you fight debt collection?
When you’re facing off against a debt collector, it’s important to know the rules the collector must follow. However, just understanding your rights isn’t enough. Debt problems need a game plan, and yours will likely depend on whether you’re dealing with a case of misidentification or if you just can’t pay the bill.
When you first fall behind on a bill, your creditor will likely contact you and ask you to bring your account current. After some time, the account will get transferred to a debt collector. That’s when the federal Fair Debt Collections Practices Act (FDCPA) will apply.
Under the FDCPA, a collector can’t:
- Harass you
- Lie to you
- Unfairly treat you
A creditor that violates the FDCPA and causes you harm might have to pay you monetary compensation and fines if you sue civilly and win.
When you fall behind on a debt secured by collateral (property, such as your house or car, that you pledge against the debt), your creditor can use foreclosure or repossession tactics to recover the property, sell it, and apply the funds to your balance. In such a case, the caller will likely be the original creditor, not a bill collector, and you’ll need to look into options other than those offered in this article.
If you didn’t put up collateral (for instance, if the debt in question is a credit card payment or a cell phone bill) the collector can call or write to you, but that’s about it. A creditor can’t take the following actions until it files a lawsuit and gets a money judgment against you:
- Garnish your wages
- Take money from your bank account
- Put a lien on your property
There are exceptions, however. For instance, the government has the right to take these types of steps if you owe taxes or student loan debt.
Your options will depend on whether you owe the debt. For instance, it might (or might not) be worth fighting a legitimate debt in court. When making the decision, consider the amount of money and time you have to spend on the case, as well as whether you have a defense. However, if you don’t owe the debt, you’ll likely want to take action.
If you owe a debt, paying it in full or negotiating it down to a lower amount might be your best bet. If you don’t have the funds, you have other options:
- Set up a payment plan
- Consider debt settlement
- Look into debt consolidation
If it isn’t your debt, you’ll likely want to dispute it. Here are a few suggestions that might work in your favor:
- Request validation of the debt
- Dispute the debt in writing
- Check your credit report for inaccuracies
You can file a complaint with the federal Consumer Financial Protection Bureau or through a consumer protection office in your state. Many states have more stringent laws governing debt collectors. For help finding federal or state agencies, go to USA.gov.
This general information doesn’t address all aspects of the collection process and isn’t legal advice. You should meet with a lawyer for an evaluation of your particular case.
If a debt collector sues you, you could have a defense. A lawyer can explain what defenses might apply in your situation.
How do debt collection agencies work?
A debt collection agency is a company that attempts to collect delinquent debts from individuals or businesses, either on behalf of the original creditor or on its own. Debt collectors are subject to federal and state laws on what they are allowed to do and not do.
Debt collection agencies can be hired by creditors to collect debts they are owed but have been unable to collect through their own efforts. Those debts can include credit card accounts, medical bills, various types of loans, and even unpaid utility bills. If the collection agency is successful, the creditor typically pays a percentage, often 25% to 50%, of the amount the agency recovered.
For difficult-to-collect debts, some collection agencies will negotiate settlements with borrowers for less than the amount owed. Debt collectors may also refer cases to lawyers who file lawsuits against debtors who have refused to pay.
Some debt collection agencies work on their own behalf. They buy delinquent debt from the original creditor—usually for pennies on the dollar—and then attempt to recover as much of it as possible. Whatever they recoup is theirs to keep.
Whether they’re working for another creditor or for themselves, debt collectors work in similar ways. They will attempt to contact delinquent borrowers through phone calls and letters and try to persuade them to pay what they owe. They can also conduct searches for a debtor’s assets, such as bank and brokerage accounts, to determine their ability to repay.
A debt collector has to rely on the debtor to pay and cannot seize a paycheck or reach into a bank account, even if the routing and account numbers are known—unless the debt collector has obtained a court judgment ordering the debtor to pay.
To accomplish that, the debt collector must sue the debtor before the statute of limitations runs out and win a judgment against them. (Different states have different statues of limitations on how old a debt can be before it becomes “time-barred,” freeing the debtor from responsibility to repay it.) A court judgment allows a collector to begin the process of garnishing wages and bank accounts, although the collector must still work through the debtor’s employer or bank to obtain the money.
Debt collectors may also contact delinquent borrowers who already have judgments against them. Even when a creditor wins a judgment, it can be challenging to collect the money. Along with placing levies on bank accounts or motor vehicles, debt collectors can try placing property liens or forcing the sale of an asset.
Debt collectors have a longstanding reputation for harassing consumers. The Federal Trade Commission (FTC) has said it receives more complaints about debt collection than any other single industry.
The federal Fair Debt Collection Practices Act lays out rules for what debt collectors are and aren’t allowed to do in their interactions with debtors and other parties. For example, debt collectors generally aren’t.
Do debt collectors ever sue?
If you receive a notice from a debt collector, it’s important to respond as soon as possible—even if you do not owe the debt—because otherwise the collector may continue trying to collect the debt, report negative information to credit reporting companies, and even sue you. If you get a summons notifying you that a debt collector is suing you, do not ignore it—if you do, the collector may be able to get a default judgment against you (that is, the court enters judgment in the collector’s favor because you didn’t respond to defend yourself). The debt collector could then garnish your wages and bank accounts, meaning it could take money from your paycheck or accounts. Make sure you respond by the date stated in the court papers so you can defend yourself in court. If you are sued, you may want to consult an attorney.
The law protects you from abusive, unfair, or deceptive debt collection practices. Here is information about some common debt collection issues:
- It is important that you respond as soon as possible if a debt collector contacts you about a debt that you do not owe, that is for the wrong amount, that is for a debt you already paid, or that you want more information about. Make sure you respond in writing to dispute the debt. If you don’t, the debt collector may keep trying to collect the debt from you and may even end up suing you for payment.
- Within five days after a debt collector first contacts you, it must send you a written notice, called a “validation notice,” that tells you (1) the amount it thinks you owe, (2) the name of the creditor, and (3) how to dispute the debt in writing. Don’t give a debt collector any personal or financial information until it sends you this validation notice—it may be a scam.
Make sure you dispute the debt in writing within 30 days of when the debt collector first contacted you. If you do so, the debt collector must stop trying to collect the debt until it can show you verification of the debt. You should dispute a debt in writing if:
- For sample dispute letters, see the CFPB’s “What should I do when a debt collector contacts me?” If you have already paid the bill that the debt collector is trying to collect, include that explanation in your letter and send copies (but not originals) of any receipts, canceled checks, or other information you have to show that you already paid the bill. Send the dispute letter by certified mail with a return receipt, and keep a copy of the letter and receipt.
For more information, see the FTC’s “Don’t recognize that debt? Here’s what to do”.
Debt collectors cannot harass or abuse you. They cannot swear, threaten to illegally harm you or your property, threaten you with illegal actions, or falsely threaten you with actions they do not intend to take. They also cannot make repeated calls over a short period to annoy or harass you.
Debt collectors cannot make false or misleading statements. For example, they cannot lie about the debt they are collecting or the fact that t