I have an account in collections. What should I do?

Posted on June 12th, 2012

account in collections

Have you ever received a notice from a collections agency? You’re not alone. Nearly half of Credit Karma members currently have at least one derogatory mark, such as an account in collections, on their credit report. In our Credit Advice Center, members often ask about the best way to deal with debt collectors.

Here’s a quick step-by-step guide on what to do when facing an account in collections.

Check your credit score

If you received a letter or a call from a collections agency, first find out how the new collections account is affecting your credit score. The new account should show up in your Credit Report Card under derogatory marks, as well as your Credit Karma Notifications in your Score Center. You’ll be able to see how your score was impacted by the new derogatory mark.

Draft a debt validation letter

According to the Federal Debt Collection Practices Act (FDCPA), a collections agency must validate that they’re legally allowed to collect on your debt. Send a written request of validation within thirty days of receiving the first written notice of the debt and you’ll be within your rights, according to the FDCPA. You can see an example of a debt validation letter here.

The debt collector must stop attempting to collect the debt from you until they’ve sent a sufficient response to your letter. If they can’t validate your debt, you shouldn’t need to worry about repaying them. However, if they can validate it, you should work out a payment plan.

Negotiate an update to your credit report

If you have the funds to pay back the debt, first see if you can have the derogatory mark removed from your credit report. Write to the debt collector to ask if they’ll agree to remove the account from your reports if you pay it in full or pay an agreed-upon amount as settlement. This is called a “pay for delete” letter (example here). Do it in writing so that you retain a physical copy of the communication.

If the debt collector won’t agree to remove the account from your report (most probably won’t), write another letter to see if he’ll agree to update it to “Paid in full” once you’ve paid the debt. If you’ll be settling the debt (instead of paying it in full), he may agree to mark the account as “Paid – settled” instead.

Pay off your debt

Once you’ve negotiated with your debt collector, pay your debt as agreed. Keep proof of your payment for your records.

Monitor your credit report and score

When the debt collector has received and processed your payment, he should update your credit report to the status that you agreed upon: either by removing the derogatory mark, marking the account as “Paid in full,” or marking it as “Paid – settled.” If your credit report hasn’t been updated, you can dispute the account with the credit bureau or bureaus still reporting it. Here’s a guide on how to dispute credit report errors.

Check your credit score regularly to see how it’s affected by the account being removed or adjusted. Make sure you’re enrolled in credit monitoring so you can watch for a notification about the change.