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How to Pay Off Collections

Dodging debt collectors can feel like you’re on a high-speed chase, bobbing and weaving through traffic with the bad guy hot on your tail. Debt collectors are ruthless and relentless. They’ll stop at nothing to get you to pay up.

But what if all the phone calls, voicemails and letters stopped? (Oh, and toward the end of 2021, debt collectors will now also be able to reach you via social media, text and email.) What if you didn’t have to hide inside your own life any longer? Understanding how to pay off collections takes a little research, but it’s worth every bit of effort. So let’s get right to it.

How to Pay Off Debts in Collections

In Baby Step 2, you’re using the debt snowball method to pay down debt. That looks like adding up all your debts (except your mortgage) and sorting them from smallest to largest. Then you start chopping away at those debts one at a time, making minimum payments on everything but the smallest debt. With that one pesky, buzzing mosquito of a debt, you throw every penny you’ve got at it until it’s gone.

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But just because you’ve made a commitment to getting out of debt, doesn’t mean debt collectors will call off the dogs. When it comes to how to pay off collections debt, you need a plan.

Confirm the debt.

Before you hand over any money to a debt collector, you need to confirm the debt first. Yes, you. Do not leave it to a debt collector to tell you what you owe. You need to submit a debt validation letter to make sure everything is on the up and up.

A debt validation letter needs to be submitted in writing, preferably by certified mail with a return receipt so you have a paper trail of every step you’re taking. Debt collectors are crooks. They’ll use any means necessary to skirt the law and make you pay.

Submitting a debt validation letter does a few important things:

  1. Formally requests that the debt collector reveal the creditor they’re representing along with proof of the balance. Remember, most of the time debt collectors are not the original owners of your debt. They’ve purchased your debt from a creditor.
  2. Confirms the age and amount of the debt. You need to check your records against theirs. Any errors need to be fixed on your credit report.
  3. Asks for confirmation that the collection agency has the authority to collect on your debt. Avoid a potential scam by making sure the people you’re paying back have the authority to request it.

Check the statute of limitations.

All consumer debt—think credit cards, mortgages, auto loans—have statutes of limitations around them. That means after a certain amount of time (could be three years, could be as many as 15 years, depending on where you live), creditors can no longer take legal action against you to make good on your debt. Which means the collection agencies they’ve sold your debt to can’t either.

But please hear this: This is not a get out of jail free card! Literally or figuratively. Let’s say the statute of limitations in your state on a defaulted auto loan is seven years. That doesn’t mean you can sit on your hands for seven years, not paying what you owe, waiting for the debt to “disappear.”

First of all, the debt doesn’t disappear. Debt collectors can still contact you after the statute of limitations has passed, they just can’t take legal action against you. And then there’s the fact that it doesn’t take much to send your debt right back to square one as far as statutes go. Any inquiries, from you or the creditor, or any payments you make, no matter how infrequent, count as “activity,” and restart the clock. 

The waters can get a little muddy here, especially if you’re nearing the end of a statute of limitation. But remember, you’re trying to set the record straight, not dodge trouble (and phone calls) for the rest of your life. When you take on the responsibility of paying back what you owe, you’re acting out of integrity. There’s no price tag you can place on that.

Make a plan to pay it off.

Here’s where the rubber meets the road. In Baby Step 2, you’re in full-on Rambo mode against your debt. And you set the priorities for your family, not some shady debt collector. Before one nickel goes to a debt collector, make sure your Four Walls are met: food, shelter, utilities and transportation. You shouldn’t ever have to choose between packing your kid’s lunch or paying on a busted car loan.

We’re going to walk you through the “pro rata” plan. Pro rata means “fair share.” Look, if you never pay on any of your debts, you will probably get sued. It’s that simple. But you’re not up a creek yet, even if you can’t afford the minimum payments.

Once you’ve confirmed what your balances are, it’s time for some quick math. Let’s take a look at Neal. First, he subtracts his necessities (the Four Walls) from his income. What he’s left with goes toward the rest of his bills: health insurance, car insurance, garbage pickup and more. Remember, you’re giving every dollar a job at the beginning of the month. In Baby Step 2, once you’ve hammered out your budget, any funds you have left should get thrown at your debt. So after Neal creates his monthly budget, he has $100 left to put toward debt.

Now he looks at his debt and his monthly payments and writes that number down. He comes up with $2,000 of debt. Neal figures out he owes $1,000 in minimum payments each month. Since the sum of his minimum payments is greater than his disposable income of $100, he doesn’t have enough money to pay all his minimum payments. This is where the pro rata plan comes in.

With his debts listed from smallest to largest, he knows first on his list is a Home Depot credit card with a minimum payment of $100. When he divides $100 by his total debt of $2,000, he sees that Home Depot accounts for 5% of his debt. That means he’s going to give Home Depot $5. Now, rather than picking and choosing who he pays each month, Neal’s going to pay a fair share of his extra income to all his creditors so everyone gets a little something. As soon as his disposable income is more than his minimum payments, he’ll start throwing all his extra cash at his smallest debt. Plus, he’s got killer gazelle intensity and is working to speed up his debt snowball. A side job, extra hours at his daytime gig, selling a garage’s worth of stuff—Neal’s on a mission to be debt-free ASAP.

By using the pro rata method—which you should type out and mail to your debt collectors or creditors—it’s a show of good faith that there’ll be more to follow, even if it’s five bucks at a time. And the last time a debt collector turned down money was, well, never.

Contact the agency and make payments.

With the debt snowball strategy and the pro rata plan in place (if it’s needed), you need to make this official with the collection agencies. Always, always, always get everything in writing—every single time, no matter what. This is the best way to protect yourself if a collection agency tries to backpedal later.

If you’re sending correspondence of any kind to collection agencies, make a copy, send it via certified mail, and request a return receipt so you can know for sure that your documents were received and on what date. This is especially important when you send in your final payment. Send a cashier’s check via certified mail. Staple the payment agreement, the certified mail return receipt, and a copy of the cashier’s check together. Hold onto all of it forever in the event the collection agency rears its ugly head again.

Whether you have enough disposable income to start making minimum payments or not, reach out to the agencies contacting you and let them know what you can do. Most of the time they’ll take something over nothing.

Here are some approaches on how to pay off collections:

  • Pay in full. If you owe the money and have the money, you should pay the money.
  • Negotiate a payment plan using your pro rata plan. Let them know you can pay something each month and show them how.
  • Ask to settle the account. Your request could mean 50% or more of your debt is wiped out. If they bite, be ready to pay the agreed upon amount right then.

Never allow a debt collector access to your bank account. There’s no guarantee they won’t take more than what you agreed to.

Look, you can’t wave a magic wand and make money you don’t have appear no matter how much pressure a debt collector puts on you. So don’t be afraid to push back on them. Debt collectors sit safe in their cubicles making endless phone calls designed to shame and guilt you. You don’t have to listen to it. Debt is serious business that needs to be taken care of—not so you can make debt collectors happy but so that you can live debt-free. Stand up for yourself, don’t be afraid of them, and pay down your debt as fast as you can.

What Happens if You Don’t Pay a Debt Collector?

Debt collectors have one job, and it’s to get your money. And most of them can outlast your frustration, embarrassment or evasion.

But here’s the thing. Just because you’re behind on payments doesn’t mean you deserve to be mistreated, harassed or abused in any kind of way. You have legal rights and protections.

You do have a responsibility to try to make good on your debts though. Besides, the sooner you get conversations going with collection agencies and make arrangements for payment, the sooner they’ll back off. It’s amazing how even $5 a month can keep the wolves from the door.

But if you continue to miss payments after you’ve been sent to collections, collection agencies are well within their rights to sue you. If that happens, you’ll have to appear in court, and the judge is almost guaranteed to side with the collection agency. Judges aren’t concerned with circumstances or details. For them, it’s cut and dry: If you owe the money, you gotta pay it. If you don’t make your court-ordered payments, then the collection agency can pursue an arrest warrant.

Avoid Debt Collection Scams

It makes sense. When you’re in debt, anything that looks like a solution to getting out of debt sounds good. But unless your plan includes getting all the facts in order about your debt and obliterating the debt, you’re headed for trouble.

You may be in debt, but you’re not desperate. Sleazy debt collectors are a dime a dozen and so are their ugly counterparts: credit report clean up companies and companies that promise to settle your debts for you. Don’t ever pay someone to provide these “services.” They’re scams designed to squeeze even more money out of hurting people.

If you want to know the best next step for your situation, book a free call with a Financial Coach and get advice we stand behind.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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