How to Pay Off a Debt in Collection

There’s More Than One Way to Clear Your Debt

how to pay off a debt in collection: pay in full, set up payment arrangements, settlement

The Balance / Caitlin Rogers

A debt collection is a severely past-due credit account. In fact, it's one of the worst types of entries you can have on your credit report. Having a collection on your credit report, especially a recent one, can affect your credit score and make it harder to get approved for credit cards and loans. If you're cleaning up your credit report, reducing the impact of collection accounts is important.

Dealing with debt collection can be tricky. Paying a collection doesn't always have the intended impact on your credit score, and working with collection agencies is sometimes difficult. Fortunately, there are some proven strategies for handling a debt in collection.

What Is Debt Collection?

A debt collection is a delinquent account that's being pursued by a third-party collection agency. Collection agencies work on behalf of other companies—those you created the debt with—to recoup the money from accounts you've fallen behind on. Debt collectors are typically allowed to keep a percentage of the money they collect from consumers.

Falling several months behind on almost any type of monthly obligation puts you at risk of being sent to collection. This includes credit cards, auto loans, student loans, medical bills, utility bills, and even library fines.

Debt collectors may also contact you about debts you co-signed. Be sure to review all details and clearly understand the commitment you’re making before co-signing a loan.

How Does Debt Collection Affect Your Credit Score?

Payment history is a major factor in your credit score, so if a collection appears on your report, your score may drop significantly. While an overall good credit score can outweigh a couple of late payments, it’s important to continue paying all bills on time to avoid the risk. 

If the collection is recent or remains unpaid, you might have an especially hard time getting approved for credit cards and loans. The FICO score, for example, considers whether a collection appears on your credit report and when it was reported. Generally, the more recent the collection, the more impact it will have on your FICO score. 

Collection accounts stay on your credit report for up to seven years. Typically, as the account gets older and you continue to add positive information to your credit report, the effect on your credit decreases.

How to Pay Off Debt in Collection

Before paying a collection, make sure it's valid and within the statute of limitations—the time when you can be sued. You can send a written request to the debt collector. In it, ask for information proving the amount you owe and showing that they're authorized to collect the debt.

Once you've received sufficient proof of the debt and you've decided you want to move forward with payment, here are your best options, from most to least desirable.

Pay in Full

Pros
    • Your credit report will show a fully paid balance
    • Collection calls will stop
    • You won't have to negotiate with the collection agency
    • You won't have to include canceled debt on your taxes
Cons
    • There's no guarantee your credit score will improve

Paying a collection relieves you of the debt’s burden, relieves you certain tax liabilities, and updates your credit report with a paid balance. However, it doesn't always remove that collection from your credit report and isn't guaranteed to improve your credit score. Paying off a collection could increase, decrease, or have virtually no impact on your score.

How much a paid collection impacts your credit score depends on the other information in your credit report. For example, the payment won't improve your credit score much, if at all, if you have other negative information on your credit report. But if the collection is the only negative information being reported, paying it off will likely improve your score. 

To have negative information removed from your credit report, consider negotiating a pay for delete offer. This strategy is best used for debts that can’t be disputed with credit bureaus, as you actually owe them. 

Set Up Payment Arrangements

Pros
    • You can pay based on your budget
    • Collection calls will stop
    • You won't have to include canceled debt on your taxes
Cons
    • Making a payment can give the collection agency more time to sue

If you can't afford to pay the full balance, the collection agency may be willing to accept smaller monthly payments toward your debt. Review your budget, figure out the amount you can afford to pay each month, and propose that number to the collection agency. Once you've reached an agreement, get it in writing before making a payment toward the debt.

The statute of limitations for paying debt varies by state and by debt type. Consider discussing your debt payment plan with a lawyer before deciding how to move forward with the payment. 

Settlement

Pros
    • You won't have to pay the full balance
    • Collection calls will stop
Cons
    • Can be difficult to negotiate
    • The debt shows as settled on your credit report
    • Admitting to the debt or making a payment could give the collection agency more time to sue
    • You may owe taxes on the canceled amount of the balance

A settlement payment is an amount that's some percentage less than the total amount due. In exchange for settling, the collection cancels the remaining balance. 

You can attempt to negotiate a settlement by phone, but make sure you have an agreement in writing before you proceed. Request that the collector mail or fax you a letter including the terms of the agreement before making a payment.

Be careful negotiating a settlement that's nearing the expiration of the statute of limitations. If you say something that conveys responsibility for the debt, you could accidentally reset the statute of limitations.

How Can I Get Help Paying Off Debt in Collection?

While you can work with collection agencies on your own, it may be helpful to get assistance from a nonprofit credit counseling organization. A credit counselor can help you figure out how much you can afford to repay, and they may even negotiate a payment plan with the collection agency.

As a last resort, you may also consider a for-profit debt settlement company to help you work out a settlement arrangement with the collection agency.

The Bottom Line

After paying your debt in collection, monitor your credit report to make sure the debt collector updates your account—it should reflect a balance of zero. Be sure to keep proof of payment in case you ever need to show that you've paid the credit bureaus or another collection agency down the road.

Avoid future collection by staying current on your payments. If you're experiencing financial hardship, contact your creditors right away to explore options that will allow you to keep your account in good standing.