What Happens if I Make a Deal With a Collection Agency?

Collection agencies use a variety of methods to attempt to collect past-due debts. Initially, collection agencies usually attempt to collect the debt in full but in some situations, collection agencies strike deals with debtors in which the debtor can settle the debt for a fraction of the outstanding balance. If you make such a deal with a collection agency, it usually signals the end of your dealings with that firm.

Collection Agencies

Collection agencies often buy bad debts from lenders. The collection agency pays a nominal fee to the creditor and thereafter the agency has a legal right to any payments made toward the debt by the borrower. Many collection agencies act as agents on behalf of lenders, which means that the lender retains the debt but the collection agency receives a fee if the debtor agrees to make a payment toward the balance owed. Legally, collection agents can contact you between 8 a.m. and 9 p.m. local time, although you can stop collection agents from calling you at work by submitting a request for the contact efforts to stop.

Credit Score

Debt settlement arrangements with collection agencies and lenders have a negative effect on your credit score. Credit bureaus partly base your credit score on your payment history. In a debt settlement arrangement, you only pay off a portion of the balance owed and the outstanding balance remains on your credit report. The delinquent account appears as "closed" rather than "delinquent" on your credit report, but the fact that you failed to repay the debt in full may dissuade other creditors from lending you money in the future.

Limitations

Collection agencies can use a variety of techniques to attempt to collect payment on past-due debts ranging from telephone calls and letters to court action and garnishments. These efforts cease when you enter into a debt settlement arrangement. However, every state has a statute of limitations on debts after which neither lenders nor collection agencies can take you to court. Debt collectors can continue to contact you after the statute of limitations expires but have no recourse against you if you refuse to settle the debt. The statute of limitations varies from three years to 15 years depending on the type of debt and the state in which you live.

Considerations

If you fail to settle your past-due mortgage debt with a collection agency and you go into foreclosure, laws in some states allow your lender to sue you for the remainder of the mortgage debt many years after the foreclosure sale occurs. Furthermore, a debt collector agreeing to accept a reduced payment on a debt and the original creditor agreeing to close the debt are not necessarily the same thing. You may think that you have resolved a debt issue, only to have a new collection agency buy the debt and begin proceedings against you. Therefore, understand the terms of the agreement before agreeing to any proposals from collection firms.