Photo: Flickr user Quazie.

Dealing with debt collectors isn't a pleasant experience for most people, but it doesn't need to be stressful and traumatic either. As long as you know your rights and are aware of the power you have in the situation, dealing with debt collectors can be a low-stress activity, and could potentially save you money while boosting your credit score at the same time. With that in mind, here's what you need to know before picking up the phone the next time a debt collector calls.

Know your rights: what debt collectors can and cannot do
Debt collectors are notorious for their aggressive tactics, but it's important to know that the law is on your side. Specifically, the Fair Debt Collection Practices Act, or FDCPA, establishes guidelines for what debt collectors can do to collect a debt, and what tactics are unacceptable.

For example, some things that debt collectors can do include:

  • Attempting to contact you by phone, mail, fax, or in person (although in-person collection attempts are rare).
  • Contacting third parties such as friends or relatives to obtain your current address or phone number, but they may only discuss your debt with you or your lawyer.
  • Telling you how much you owe, who your original creditor was, and whether they can offer you settlement options.
  • Threatening to sue you, provided the statute of limitations hasn't expired.

The FDCPA also protects consumers from deceptive practices, as well as harassment from debt collectors.

Deceptive practices are pretty easy to spot. For example, the collectors can't threaten to have you arrested or tell you that you're committing a crime by not paying. If you ask, they also must tell you exactly who they are and the purpose of their call. It's 100% illegal for debt collectors to claim to be an old friend to get you on the phone. They also must be honest about how much you owe and whom you owe the money to.

Harassment is a little tougher to define, but there are a few blatant no-nos. Debt collectors are not allowed to use profanity when speaking with you, nor are they allowed to call you at work if you've asked them not to. They can only call between 8 a.m. and 9 p.m. and are prohibited from making calls intended to "annoy, abuse, or harass you." There is some grey area here, but generally speaking, if a debt collector calls you more than once a day, it's too much.

If you feel a debt collector has stepped over the line, hang up the phone and submit a complaint with the Consumer Financial Protection Bureau

The statute of limitations
You may have heard that negative information stays on your credit report for seven years. Similarly, the statute of limitations on debt limits collection efforts after a certain amount of time, which varies by state. The timeframe is generally between three and six years, but can be up to 15, depending on where you live. The clock starts from the date the original account (not the collection account) first became delinquent. If more than seven years have passed, the debt collectors no longer have the power to report the debt to the credit bureaus, and if the statute of limitations has expired, they don't have the ability to sue you for it.

However, it's important to note that just because they can't take legal action doesn't mean you no longer owe the debt. The debt is still yours, and the debt collector can continue to contact you in an effort to collect it. Whether you should pay older debts is a moral question and is beyond the depth of this article. Just know that if you receive a collection call for an unpaid credit card bill from 20 years ago, that collector has every right to call you.

If you aren't sure the caller or debt is legit
In a perfect world, you would only receive calls from collection agencies trying to collect legitimate debts. Unfortunately, we don't live in a perfect world, and there are scammers out there who try to collect on debts they don't own.

There are a few ways you can verify that a collection attempt is valid. A good place to start is with a copy of your credit report, which should have the names and contact information of your current debt collectors. You are entitled by law to a free copy of your credit report from each bureau once a year, and you can get yours at

If the debt collector calling you is different from the company listed on your credit report, you can call the listed agency or the original creditor to confirm that the debt has been sold. The law requires lenders to keep track of debts they sell to collectors, so they should be able to confirm whether the debt collector you spoke with is authorized to collect the debt.

You have more room to negotiate than you may think
Under the newest FICO scoring formula, collection accounts that have a zero balance no longer count against you for credit scoring purposes. This includes accounts that you settle for a lower amount than your outstanding debt, which in past FICO formulas were counted as negative items. In other words, the benefits of resolving your old collection accounts are better than ever. Not only will you get those annoying debt collectors to leave you alone, but you could also significantly boost your credit score.

When negotiating with debt collectors, it's important to realize that you have most of the bargaining power -- and you may be surprised how much of a "discount" you can get. The debt collector probably purchased your debt for mere pennies on the dollar, especially if it's several years old, and doesn't need to collect much from you to make a profit.

For example, let's say you owe $1,500 for a charged-off credit card, and a debt collector sends you an offer to settle the account for $1,000. Well, if you call and say that $500 is the best you can do, the collector may be inclined to take it. The worst that can happen is a "no," and it's more likely that the collector will meet you in the middle somewhere.

After an account is settled, you no longer owe any money to the debt collector or any other creditor for that particular account. Make sure you get any settlement offer in writing before you pay, so you'll have the proper documentation to show the credit bureaus if necessary.

It's important to note that many lenders don't use the latest FICO formula, so your credit score can potentially still be affected by paid collections when applying for a loan. However, a paid or settled collection still looks a lot better than an unpaid one, and many lenders won't approve you with an outstanding collection account regardless of your credit score, so it's in your best interest to try to come to an amicable solution.

The Foolish bottom line
As long as you know your rights and how to verify whether a debt collector is legitimate, you'll be well prepared for those phone calls and letters. Under new credit scoring formulas, paying off or settling collection accounts can boost your credit score tremendously, so it's in your best effort to at least attempt to come to an amicable payment arrangement with your creditors -- and you may be surprised at how cheap of a settlement you could get.