How Does Debt Collection Work? A Helpful Guide

The average American faces some challenging economic times today. The average person carries about $38,000 in personal debt. Wages are stagnant, necessities cost more and more people are struggling to get by each month.

That leaves little room for error when paying off debts. A bad month or a pandemic could lead to panic and collections calls. Debt collectors have to follow a process to collect on your late payments.

How does debt collection work? You should learn the process so you can handle these calls when they come in.

Read on to find out how debt collection works and how you can give yourself peace of mind.

Getting into Debt

It’s not hard to get into debt. You take out a loan or charge something because you didn’t have the funds that month.

You do so intending to pay back the money, but it doesn’t always work out that way. You miss a couple of payments and fall behind on your loan or installment payments.

Between 90-180 days, the company you owe money to is ready to take a loss on that debt. They see it as unrecoverable and they’ll do one of two things.

They may hire a debt collection agency to recover the debt. The other option is to sell that debt to a collection agency for pennies on the dollar.

In both cases, the collections agencies make money when you pay back the money. That can lead to intimidating tactics.

How Does Debt Collection Work?

The debt collections process will vary, depending on the type of debt. The process to collect tax debt will be much different than credit card or loan debt.

The IRS has its own collections process, which could ultimately lead to a bank levy, a lien on your home, or wage garnishments.

The IRS has also recently started to work with private collections agencies to recover some tax debts.

Credit card debts, medical debts, and bank loans may all go to collections. Once your debt lands at a collection agency, you will get called regularly to collect the debt.

That will continue to happen until the statute of limitations runs out or you agree to pay the debt.

Can You Get Sued for Debt?

It depends. There are many instances where debt collectors will try to recover the debt in court. They may be able to convince a judge that you’ve been non-responsive or ignored them.

They may find that they have no other choice but to file a lawsuit and try to garnish your wages or take other assets.

How to Handle Debt Collection

The phone rings and you know that it’s a debt collector. These tips will show you how you can handle any debt collection calls. 

Don’t Ignore Your Debt

Debt is scary and it can lead to mental health issues. It’s widely reported that the stress that debt carries leads to depression and anxiety.

That’s why so many people choose to bury their heads and hide from the debt. Unfortunately, that’s the worst thing you can do.

Your debts won’t go away and the problem will become much larger and scarier. You have to find the courage to face your debt and handle the situation.

Know Your Rights

Just because you’re scared to handle debt doesn’t mean that you’re powerless. The more information you know about how debt collections work, the better off you’ll be.

There are things that debt collectors can do legally. There are also tactics that they’ll try that aren’t legal in an attempt to scare you into paying your debt.

The most important thing you can do is find out what your rights are as a consumer. The Fair Debt Collection Practices Act is a good place to start.

This is a federal law that tells debt collectors that they can’t call you at 3 am or harass you for an unpaid debt.

Talk to An Attorney

It’s a good idea to consult with a debt collection attorney early in the process. They can educate you about your rights, help you settle a debt, and make sure you’re being treated in a way that’s fair and legal.

Understanding Your Options

You do have a few options to pay your debts off. You can pay the debt in full, agree to monthly installments, or settle the debt and pay less than what you owe.

Which option is right for you depends on your situation. For example, if you find that you don’t have a lot of income right now and you can make a small monthly payment, start there.

Most collections agencies are understanding and are willing to work with you. You may start with a lower monthly installment for the first few months, and then increase your monthly payments over time.

You may also be able to change your plan. You can start with installment payments and if you have some extra cash available, you may be able to convince the collection company that it’s in everyone’s best interest to settle the debt.

Keep in mind that if you do settle your debt, there could be tax implications. The IRS considers any settled debt more than $600 as income. That has to be reported on your tax returns.

How can that affect you? Let’s say you made $32,000 this year. You would normally pay income taxes on $32,000. Now, if you settle a $20,000 debt and agree to only pay $5,000, there’s $15,000 that has to get reported to the IRS.

Your annual income shoots up to $47,000. That could leave you with an unexpected tax bill and you’ll owe the IRS on top of your other debts. That doesn’t mean you shouldn’t settle your debt. You just have to know the consequences of doing so.

Understanding How Debt Collection Works

How does debt collection work? It depends on the type of debt you have, but in many cases, unpaid debts wind up with a collection agency. If your debt ends up there, it’s important to take the issue head-on and know your rights.

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