However, while paying your debts is important, there are reasons not to pay a collection agency. The most likely scenario is that you pay the debt you owe, then you have to wait six years for the information to be removed from your credit report. If they can obtain a judgment against you in court, they are then able to garnish your wages or freeze your bank account.
These are obviously not situations that you want to happen. However, since going to court is costly and time-consuming, it usually only happens in cases where a large amount of money is owed. This is a different situation from explaining why you should not pay creditors.
Creditors are owed money and, if you can repay them on time, you certainly should. However, once you start missing payments and the debt goes to a collection agency, it negatively affects your credit rating and the situation regarding payment may change. As mentioned, there are reasons not to pay a collection agency. What it does mean is that you should not pay a collection agency assuming that it will help avoid damage to your credit report or prevent damage from happening in the first place.
If you miss payments on your debts, the creditor will likely pass this information on to the major credit bureaus TransUnion and Equifax in Canada. This will negatively affect your credit score.
If you miss enough payments that the creditor sources an outside collection agency to attempt to collect, then your credit score has almost certainly been negatively affected already. Your credit report contains information on every loan you have taken out in the last six years. If one or more of these debts ends up going to collections, this fact remains on your credit report for six years even if you pay the debt. If you do decide to pay the debt, a consumer proposal may substantially reduce the amount you have to pay back.
If they are able to get a court judgment against you, they can then take further collections action such as garnishing your wages. However, this typically only happens in cases where the amount owing is large enough to justify the time and money it takes to go to court.
A consumer proposal may help you completely avoid such a scenario. If you decide to work with a credit counsellor on a debt management plan, you will likely still have to pay the debt in full.
You may, however, save some money in interest charges or be given more time to pay the debt. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.
Compensation may factor into how and where products appear on our platform and in what order. But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you.
That's why we provide features like your Approval Odds and savings estimates. Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can. Debt collectors are typically people or agencies paid by creditors to collect on certain past due debts. Instead, educate yourself about your rights, the effects on your credit, and your best options for working with debt collectors. When you have a debt in collections, it usually means the original creditor has sent the debt to a third-party person or agency to collect it.
Credit card debt, mortgages, auto loans and student loans are a few types of debt that can be passed on to a debt collection agency. Most lenders will try to collect the debt themselves before resorting to writing it off and passing the collection to another party. There are scammers that masquerade as debt collectors. Here are a few telltale signs that you could be dealing with a scammer instead of a legitimate debt collector, according to the Consumer Financial Protection Bureau.
Then check with your original creditor to see which collector it has assigned the debt to if any. Credit bureaus assign late payments to various categories, such as 30 days late, 60 days late and days late.
The longer the payment is past due, the more it can hurt your credit score. Since your debt may have been bought and sold by multiple collectors, be sure to look at your most-current credit reports to determine which company to contact. Credit Karma offers free credit reports from two of the major consumer credit bureaus, TransUnion and Equifax.
The next step is actually getting on the phone with an agent from the debt collection agency. Consider paying a little extra to send it by certified mail and get a return receipt. If you fail to pay off a medical bill or credit card bill, for example, the original company owed may write off your debt as a loss and sell it to a debt collection agency.
Generally speaking, companies sell your debts to debt collection agencies after you become severely delinquent on a payment. Think of it as a last resort, of sorts. The debt collection agency will then attempt to recover the money owed. In some cases, this could mean a nonstop litany of phone calls and notification letters.
Unfortunately, accounts reported as being in collections can have a significant effect on your credit scores. The actual number of points your scores drop may vary depending on the credit scoring model, but your payment history is typically considered a high-impact credit factor across different scoring models. Generally, the higher your starting score the more points you could lose. A collections account typically stays on your credit reports for up to seven years, plus days from the date the account first became past due.
The good news is that the negative impact to your scores can decrease over time, until the account drops off or is removed from your reports.
For more on this — and what you can do to mitigate any negative effects — read our article on how debts in collections affect your credit. A debt collection agency may or may not choose to sue you for your unpaid debt.
Each state has its own statute of limitations that determines how much time a debt collection agency has to take legal action, but for many states it ranges from three to six years. Heads-up: If you receive a summons to appear in court but you ignore it, a court can issue a judgment against you.
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