If you are among the millions of Americans with collection accounts on your credit, dealing with them may seem daunting. However, with a little bit of knowledge and planning, there is light at the end of the tunnel.
First, know your rights
Before you begin the process of dealing with collectors, you need to know what they can and cannot do.
Debt collectors are allowed to contact you by phone, by mail, by fax, or even in person. They can call your relatives and friends to try to find out your current address or phone number if they are having a hard time finding you.
For example, debt collectors are not allowed to threaten doing things they can't do (like having you arrested), make false claims, or use foul language. They also cannot call you repeatedly or make calls specifically intended to annoy or harass you. Obviously, there is some gray area here, but contacting you more than once per day can be considered excessive. When they do call, they are required to let you know who they are and why they are calling.
For a full list of your rights, read through the Fair Debt Collection Practices Act, which protects you from these practices and several others by collectors.
Further, the statute of limitations on many debt collection practices is seven years from the date the original (not collection) account first became delinquent. So if any of your collection accounts first became delinquent more than seven years ago, the collectors cannot report them on your credit or sue you to try to collect. They can, however, continue to call you and make other attempts to collect the debt.
You have more power than you may think
The collection agency that owns your debt most likely picked it up for a fraction of its value or is being paid by your original creditor for its services. And the agency's employees work on commission, so they have a strong incentive to bring in some money.
As a result, you have a lot of power to negotiate a settlement that is significantly less than the original amount of your debt. Collection agencies will often send settlement offers to you, but if you call and offer to make a lower payment today, they may be inclined to take it. If you can't afford to pay all at once, small monthly payments may also be an option.
It doesn't hurt to ask, and the worst they can do is say "no." If your offer is unacceptable, they may still try to meet you in the middle, so give it a shot. After all, if you owe $1,000 and the company paid $200 to acquire your debt (just an example), any money it makes on top of that amount is profit.
Why it's very important to get it done
It's common knowledge that collection accounts can severely damage your credit, but under the new FICO scoring rules, it's even more beneficial to try to settle your accounts.
Under the newest formula, collection accounts that have no further financial obligation (paid or settled) will have no impact on your credit score. In the past, collections that were settled were still pretty bad for your score, and even collections that were paid in full weren't much better.
It's worth noting that even though they won't be factored into your score, paid and settled collections can still show up on your credit report, so lenders can still see them when making decisions. Not all lenders have updated their procedures to the latest FICO formula. If they are using an older version, paid collections may still lower your score. This should be less of a problem as time goes on and more lenders update their systems, but you should still be aware that it is a possibility.
To sum it up, you have tremendous negotiating power with bill collectors, and now you can actually give your credit score a pretty substantial boost by taking care of your debts. It's definitely worth the effort, so as long as you know your rights, you have no need to fear the next call from your debt collectors.