What Happens When You Pay Off a Collection Agency?

Many consumers that have fallen behind on their debt payments end up negotiating with a collection agency to pay off the debts. Consumers in this situation need to maintain accurate records about the debt and assure that the collection agency properly reports the paid debt. Consumers should also understand how paying the debt will impact their credit score and future ability to borrow.

Required Documentation

When a consumer pays off a collection agency, it is important for the consumer to have the terms of any settlement in writing or proof of the amount of debt owed when paying in full. Consumers should obtain a copy of the returned check as proof of payment. The consumer should then securely store all of this documentation. Though keeping all of this for life may be an inconvenience, it may later be important for a consumer to able to prove that the debt was paid.

Collection Efforts

Once a consumer has paid off a collection agency in full, or made a full payment on a settlement account, all collection efforts should stop. It is not uncommon for other collectors to improperly attempt to collect on the forgiven debt after a settlement. This is one reason why consumers should keep complete documentation of the payment. Paying off an old debt may also have implications to the consumer regarding other old debts. As collectors can see the information about the payment on a consumer's credit report, other collectors may again renew collection efforts for other accounts.

Credit Report

When a consumer pays off a debt with a collection agency, the agency should update the consumer's credit report. While the credit report will still show that the debt became past due, it should state that it was paid. Consumers should check their credit reports after paying off a debt to a collection agency to make certain the agency reported the changes. If the agency did not make the report, the consumer can use their documentation to have the reporting agency correct the information.

1099 Issuance

If a consumer settles with a collection agency, paying less than the full amount of the debt, the agency may issue a 1099 to the consumer. A 1099 is a tax form used to report income. Since the forgiven debt creates a benefit to the consumer, it may qualify as taxable income. A creditor may also issue a 1099 if it writes off the debt without payment. If a consumer receives a 1099, he should consult with his attorney or tax professional regarding how to deal with the form. In some cases the agency may not have properly issued the 1099 or the amount forgiven may not be taxable.