Finally paying off a debt collection account removes a financial burden. You don't have to deal with the calls or letters anymore. You have peace of mind knowing that you've taken care of the outstanding debt. You can finally start to heal your credit from any havoc the collection wreaked on your credit score. If the debt collection was standing between you and a major loan, you can finally move forward in the process.
Breathe a sigh of relief, but don't erase the memory of the debt collection just yet. Sending payment to a collection agency isn’t the end of your relationship with that debt collector. After you pay the debt collection, there are a few more steps you should take to make sure the collection account is completely closed.
Make Sure the Payment Cleared Your Bank
Check your bank records to be sure your payment was processed. Keep a copy of your cleared payment. If you paid with a check, get a front and back copy of the cleared check. If you paid by credit or debit card, keep a copy of the bank statement showing that the payment cleared and any confirmation number you received from the collection agency.
Proof of payment will be useful in the future if there's ever a question about whether you actually paid the collection. For example, dishonest debt collectors may sell the debt to another collection agency or junk debt buyer, who could attempt to collect from you again. In that case, you'd show proof of your payment to turn away the fraudulent debt collector. You may also need to provide proof of payment to the mortgage lender or the credit bureaus if your credit report doesn't show that you've paid off the account.
Check Your Credit Report
Wait a few weeks, then check your credit report to confirm that the collection is reported as paid and shows a zero balance. Use the credit report dispute process if your credit report still shows the account as unpaid. Send copies of your proof of payment to support your claim.
If you negotiated a pay for delete, the collection account should be completely removed from your credit report after your payment is cleared. Contact the collection agency if that doesn't happen. Collectors aren't required to remove accurately reported information, even if it's negative, so negotiating a pay-for-delete depends on the collector's willingness to hold up its end of the deal.
Save a Copy of Your Settlement Agreement
Some unfortunate debtors have settled debts with collectors, only to be contacted for the remaining balance by another collection agency. If you negotiate a settlement—an agreement to satisfy the full debt with a partial payment—make sure you get a signed agreement and keep a copy of it on file. Unless you negotiated a deletion with your settlement payment, your credit report should be updated to show that the account was settled.
Be aware that the IRS requires you to report any debt cancellation of $600 or more on your tax return for that year. For example, if you owed $1,000 and settled the debt for $400, then $600 was canceled. The collection agency should send a 1099-C form that lists the cancellation amount. Be sure to give this form to your accountant or tax preparer to be included with your tax return. Failing to report canceled debt could result in a tax bill from the IRS later.
Frequently Asked Questions (FAQs)
How does debt collection work?
Debt collection typically refers to third-party companies that buy delinquent debt and attempt to collect. They get paid when they recover some or all of the debt. They use letters and phone calls to try to collect the debt and report it to credit bureaus. They may also negotiate settlements. They must follow the Fair Debt Collection Practices Act.
How do you settle debt with a collection agency?
To settle a debt, contact the collection agency. Confirm that the debt is yours and that the amount you owe is accurate. Offer a reasonable settlement, along with how you want the debt to be reported on your credit report. Ask for the collection agency to report it as "paid as agreed." Once you and the agency have agreed, ask for the agreement in writing, and confirm that the terms match what you negotiated. If they do, pay the amount you agreed to, and confirm that the agency holds up its end of the deal.