Should You Pay An Item In Collections Or Just Let It Fall Off Your Report?
July 25, 2018I was speaking with a client the other day about things she should consider before purchasing her first home. The conversation was going well until I asked her about her credit score. Oddly, her number was fairly low, despite her responsible use of credit.
She paid all bills on time, and her credit card use was minimal. As she eventually divulged, she did have this one old medical bill that went to collections. The amount was a whopping $81.00. Not eighty-one hundred and not eight thousand one hundred… $81.00.
In her case, the bill had been out there in collections land for a few years, and she was unsure as to whether she should pay it or just let it eventually fall off her credit report. She could easily afford to pay it, and we agreed this was the thing to do. However, her situation did cause me to ponder her question further…
When is it okay to just walk away?
The general and responsible answer to this question is Never. If we owe, we owe, and we have a contractual obligation to pay what we owe. Legally, there are steps a bill collector may take to collect money that is owed, including lawsuits leading to judgments enabling them to garnish your wages, pull funds from your bank account, or place liens on any real estate you own. There are, however, some options to get some financial breathing room on a temporary or permanent basis.
When the debt is several years old
You have probably heard that after several years, an uncollected debt eventually drops off your credit report. For the most part, this is true. Even though an unpaid bill may no longer be reported on your credit after seven years, this doesn’t mean the debt itself has gone away. In fact, collections agencies sometimes engage in tactics to keep the debt “current,” which means that the 7 year clock hasn’t even started ticking yet. And as long as a debt is shown as current and past-due, your credit score will suffer.
Each state has laws (statutes of limitation) regarding how long a collector may continue collecting a debt by suing you in court. Some debts, such as student loans or taxes owed to the IRS, NEVER go away. Even after the statute of limitations on debt collection lawsuits expires, a collector may continue efforts outside the courts to collect a debt – potentially forever. It is possible that your delinquent loan or bill could be sold and resold to a series of debt collectors over and over. Even though you may be willing and able to just let it go, the collections industry can be very tenacious.
You don’t (and likely won’t) have the money
If your difficult situation is likely to be temporary, contact your creditors and request assistance. Ideally, you want to talk to your creditors before missing too many payments. Otherwise, your lender may write off your bad debt and hand it off to a bill collector. Negotiating with a debt collector is not impossible, but your options to explain your situation and negotiate more favorable payment terms may be severely limited.
If your situation is both permanent and extreme, meaning there is no way under the sun you could ever find the money needed to pay the debt, you may be a candidate for personal bankruptcy. Before you file, however, many states require you to first complete a pre-bankruptcy counseling session with a certified credit and debt counselor. Even if you elect not to file for bankruptcy, meeting with a debt counselor is a good idea to help you objectively evaluate your situation and decide if it makes sense to take this sober financial step. Personal bankruptcy is the only legal way to truly “walk away” from your debt, but it comes with some lengthy consequences.
Remember to breathe
Owing money on a bill you can’t pay is an emotional situation, and it is natural to feel frustrated or even helpless about what to do next. A good place to start is by taking an honest and detailed review of your finances, either on your own or with the help of a trusted, unbiased financial planner or similar advisor. You may be surprised at how many good alternatives you actually do have.
Keep in mind that paying a past-due debt and having it show as finally closed may not give your credit score the immediate boost you’re looking for – it will still be reflected as something that you paid late. The further you can get that delinquency in the rear-view mirror (and paying it off gets that clock started), the more your score will improve until the item is a distant memory.