Is It Better to Pay Debt Collectors or Have Them Write Off Debt?

If you have accounts that have been charged off by your creditors and sold to a collection agency, think carefully before committing to a collector's debt repayment plan. Although you may find it morally reprehensible to ignore a collection agency, your priority should be to remake yourself in the mold of a financially responsible consumer. If you re-start the debt collection clock by making a payment, it may be years before you realize that dream.

Understanding Charged-Off Accounts

When a creditor charges off an account, a process that usually takes several months, it sells the debt for a fraction of the outstanding balance to a collection agency. The agency then attempts to collect the debt itself, earning a substantial profit. Although the lender most likely has quit adding interest and fees to the account, the debt agency may add penalties of its own. If a prolonged period of time has passed and the agency has stopped contacting you, be advised that there is a chance, albeit small, that the agency may attempt to take you to court to collect the debt.

Statute of Limitations

Check with your State Attorney General's Office regarding the statute of limitations on debt collection. Limitations vary from state to state and range from three to as many as 15 years. After this time, the debt, usually applicable for unpaid credit card bills, is not legally collectible unless a judgment is obtained against you. Mortgage and auto lenders are more aggressive and will take steps to repossess the property long before your state's statute expires.

Making a payment before the statute of limitations has expired may re-start the collection clock. For example, if your state's law provides a six-year window for a collector to sue you in court for the debt, and you make a payment on the debt after 4 years of non-payment, the clock starts again, and so do the collection efforts.

Your Credit Score and Other Considerations

If you're having debt problems, it's always better to deal directly with the creditor before the account goes to collections. Even an account that's 150 days late may be brought current. Once it's sold to a collection agency, your credit score won't be helped by making further payments. Late payments and charge-offs appear on your credit history for 7 years, although older charge-offs and "lates" affect credit less than recent ones.

At this point, look forward. Your credit history is just that: history. Focus on saving money, investing in a retirement plan if possible, and meeting basic expenses. Chances are, you didn't default on purpose, and sound planning for the future is the best medicine.

Know Your Rights

If you are contacted by a collector and you believe the statute of limitations has expired, inform the agent that they are attempting to collect a debt that is no longer legally collectible, and you won't pay unless you're taken to court and a judgment is obtained against you.

Notify the agency in writing as well. Be sure to inform them that you want them to stop contacting you.

Finally, if you decide to pay your delinquent account, make sure you get the agreement in writing.