It may start with a phone call from a company you’ve never heard of. Or, perhaps it appears as a mysterious entry on your credit report. However the news arrives, someone — or your credit report — is saying you have an outstanding collection account.
Unpaid debts can often disappear for years, then resurface at unexpected times. It may be that you had an unpaid bill several years ago that you’ve since forgotten. Since it hasn’t appeared on your credit report until now, nor have you heard from the original creditor, you may have assumed it simply disappeared.
Whatever history is behind a collection account, it shouldn’t be ignored.
Should I Pay Off Old Collections on My Credit Report?
There’s actually no definitive answer to this question, so you should never proceed with the assumption that paying it — or not paying it — is the right course of action for you.
One popular theory — likely popular because it makes not paying an old collection look like the right strategy — is to let it ride until it falls off your credit report.
There is some truth to it, though it’s not always the right course of action. Collection accounts will remain on your credit report for a full seven years after the time when they first become delinquent.
If the collection in question is more than, say, five years, the theory holds that by not paying it, it will simply disappear from your credit report after seven years.
Case closed, right? Not necessarily. As comforting as that approach may seem, it’s not always the right choice. And it won’t always let you off the hook.
Why You May Want to Pay an Old Collection
Before taking the non-payment route, there are a few risk factors you need to consider.
1. An unpaid collection account will weigh more heavily on your credit score than a paid account.
That means more negatively. For example, a paid collection may cost your credit score 20 points. An unpaid collection may cost 40. (That’s only an approximation since credit score calculations are done according to algorithms that are not available to the public.)
Depending on your credit score and where you want to take it, paying off the balance can raise your score by a few points, and do it quickly. You may need to do that in preparation for an upcoming loan application.
2. Some creditors frown on unpaid collections
Let’s say you want to apply for new credit. It may be a credit card, a personal loan, or a car loan. Some lenders look at not only your credit score, but also at any derogatory information your credit report contains. Some have specific prohibitions against certain derogatory entries, like 60- or 90-day late payments within the past two years, bankruptcies, foreclosures, repossessions, and — you guessed it — unpaid collection accounts.
Even if you have a credit score over 700, an unpaid collection account might get your application declined. After all, the lender may reason that if you failed to pay a previous creditor, you may do the same to them.
3. The creditor can pursue legal action against you
Aware that you may play the wait-seven-years-for-the-account-to-fall-off-my-credit-report game, the creditor may choose to file a lawsuit against you to recover the debt. Once they do, you not only will owe the full amount of the debt, but also any legal costs and filing fees required as part of the judgment.
Though credit reports no longer list public records, like judgments, they can show up in title searches, employer background checks, and other investigations. What’s more, armed with a judgment, the creditor will be able to take direct action against you. That can include garnishing your wages or your bank account.
4. Your state’s statute of limitations may be longer than seven years
The seven-year limit applies only to your credit report. However, a creditor can pursue a judgment against you for as long as your state’s statute of limitations provides. That varies by state, and it does exceed seven years in several states.
Finder.com published a list of the statute of limitations on debt for all 50 states as of November, 2019. But, use this only as a guide. State laws change, and there are different limitations for various types of debt. For example, the limit may be three years for credit card debt, and six years for promissory notes in the same state.
In many states, the statute runs out in as little as three years. But in others, like Ohio and Kentucky, it can run as long as 15 years on certain types of debt. Many other states extend it to 10 years. Before considering not paying a collection account, first check with your state attorney general’s office to see what the specific statute of limitation is on the debt you’re not going to pay.
Once the statute of limits on the debt expires, it becomes what is known as time-barred. That means the creditor can no longer pursue legal action against you for the debt. However, they can still attempt to collect the amount owed through other means.
For example, depending upon the laws in your state, if you make a partial payment on a debt after it becomes time-barred, the clock resets on the statute of limitations.
Let’s say the statute is seven years in your state. But in year eight, the collection agency convinces you to make a partial payment on the debt. If you do, the agency will then have an additional seven years to pursue you for full payment.
Caveat on the statute of limitation on debt
If the statute of limitations passes on a debt, make no payment unless you intend to pay it in full. And even if you do, make sure you get an acknowledgment of full payment and satisfaction of the debt from the collection agency before sending any money. Because the debt will have passed the statute of limitations, the collection agency will almost certainly cooperate in providing that letter prior to payment.
Why You May Not Want to Pay an Old Collection
The most basic reason is simply that you don’t owe it. The fact that a collection agency is calling you about the debt, or that they’ve placed the entry on your credit report means they don’t agree. That’s the situation you’ll need to change.
To make that happen, you need to get copies of your credit report from all three major credit bureaus. You’ll be able to do this through a website known as AnnualCreditReport.com. They’ll provide your official credit reports from all three bureaus — Experian, TransUnion, and Equifax — free of charge.
The purpose of getting your free credit reports is to attempt to match up the collection balance against any previous unpaid balance listed by original creditors. If you don’t find any, there’s an excellent chance the collection account is invalid.
The next thing you want to do is get a debt verification letter from the collection agency. Under the Fair Debt Collection Practices Act (FDCPA), a creditor is required to provide all relevant information about a debt. That includes the name of the original creditor, the amount of the debt, and the original date.
If they fail to provide any of this information, you can dispute the debt. You can do that with the collection agency, or by opening a formal dispute with each of the three major credit bureaus. If full information cannot be verified within 30 days, the obligation must be deleted from your credit report.
This outcome is not as unusual as it sounds. Collection accounts are often purchased in bulk by collection agencies. This often leads to cases of mistaken identity, such as when someone else has a similar name. It may well be that the debt is not yours.
If the Debt is Time-Barred
If the debt has passed the statute of limitations, and is time-barred, you probably won’t want to pay the collection even if it was legitimate. You can settle the matter by sending a letter to the collection agency advising them that the debt is time-barred.
It may help to send a copy of the statute, which you should be able to obtain on your state attorney general’s website. The letter should be sent certified mail, return receipt requested, just in case it ever becomes an issue in the future.
How to Proceed if You Decide to Pay Off an Old Collection
Let’s assume that the debt is neither time-barred nor a case of mistaken identity. In other words, you legitimately owe the amount claimed by the collection agency.
If that’s the case, you should move to resolve the issue as quickly as possible. At a minimum, you should want to remove the negative entry from your credit report. And at the extreme, you’ll want to prevent the collection from turning into a judgment.
But, that doesn’t necessarily mean you need to pay the collection account balance in full. You can certainly do that if you want to get the matter resolved quickly and don’t feel confident in your negotiating skills. But many, perhaps most, collection agencies will accept less than the full amount owed in complete satisfaction of the debt. This is especially true when the balance is several years old.
If you go that route, there’s a specific process you need to follow to make it work successfully.
Specific Steps to Settle an Old Collection Account for Less than the Full Amount Owed
Whether the collection agency contacts you by phone or mail, or if you discover the account on your credit report, it’s important to establish immediately that you want all communication between you and the agency to take place in writing.
That’s important because it will give you a paper trail to back up any agreements made, and because collection agencies typically record phone calls. By doing so, they can use any promises you make as evidence against you in court. For that reason alone, phone contact with collection agencies should always be avoided. If they do take place, be sure you get information — but never give it.
Start the process by offering less than the full amount owed. The older the debt is, the less you should offer. If it’s more than four or five years old, your initial offer should be no more than 50%. The collection agency will counter with a higher amount, and it’s likely you’ll ultimately settle somewhere in the middle.
Remember it’s a negotiation, and the collection agency will attempt to get as much as possible. Your job will be to pay as little as possible.
Once they agree to a reduced payment, require that they send you a letter confirming your agreement. It must indicate the agency is accepting $XX in full settlement of the amount owed, and that they will report the account as paid in full to all three credit bureaus.
Do not send any money until you receive this letter, even if the collection agency insists they cannot issue a letter until you send payment. Collection agencies can, and do, accept partial payments then continue to demand the full balance. A letter of agreement received in advance will be your only protection.
Be Sure to Follow Up on the Updated Credit Report Information
Once you have received a letter from a collection agency agreeing to all terms, and you have sent in your payment, wait 30 days then re-pull all three credit reports. If you continue to see an open balance on one or more of the reports, contact the collection agency and remind them of their obligation to correct the information.
If they fail to do so, you can open a dispute with the credit bureaus in question, sending them a copy of the collection agency’s letter as proof of your claim. Credit bureaus will make the adjustments directly.
Should You Pay off An Old Collection?
There may be times when not paying an old collection is the right choice. That will include when you don’t legitimately owe it, or when it has exceeded your state’s statute of limitations.
But, if you do decide to pay it, and you want to pay less than the full amount owed, make sure you go through all the steps listed above.
Getting collections removed from your credit report is a complicated process if you’ve never done it before. You’ll need to make sure you go about it the right way.
Unfortunately, collection agencies are pros when it comes to making you pay. But you can counter this by knowing your rights under the law, and following the right procedures.