Reader Question: What to do With Old Collections?

Alecia wrote in earlier this week with the following question:

My husband and I had about $3,000-$5,000 in past credit card/misc debt that went to collections after he lost his job a year into our marriage.  Now we have been married for over 6 years, and he is in the Army.  He just reenlisted and got a decent size bonus, and we were planning on paying off our collections debt. 

Because it has been so long, will a lot of those collections will be falling off our record in the next couple years?  Is it better to pay everything off, or pick and choose base on the size of debt and how recent?   I have been doing as much research as I can on what to do, but it all seems so overwhelming, and I don't know where to start.  Does making a payment start the 7 years over again?  I am quite confused over the statute of limitations.  Any advise would be much appreciated.

Let's break this down to a few different questions:

1. When do collection accounts expire? Collection records come off your credit history seven years after the last 180-day late payment that led to the account sale. For example, if you had a gym fee that was 180-days late in June 2002 and it was sold in August 2002, the record would expire in June 2009.

2. Should I pay off an old collection? This is a tricky one because there aren't a lot of visible benefits to working with the collector. Those records will come off in a year whether you pay them or not. It is a good idea to repay collections though. It will mark the record as paid and get the collectors off your back.

3. What's the best way to repay a collection?  Print out a copy of your credit report to see where you stand now. Keep a copy of this report in case the collector tries any funny business with the credit bureaus. It doesn't really matter which account you pay off first. I would start with the youngest account just because it will be reported on your credit the longest.

Contact the collector and negotiate a deal for a lump sum payment. Remember, the collector bought your debt for pennies on the dollar. If they get any money from you at all, they should be happy. Get the agreement in writing that your payment will settle the account in full from the collector before you send the funds.

Follow up after the payment is received to make sure the account is reporting correctly. The account's expiration date shouldn't change. The last reported date may be updated and the account should be marked as paid. If the collector tries anything weird, use that old copy of your report to dispute.

4. What happens if you don't pay a collection? After seven years, the collection records will come off your credit reports. But that doesn't mean the collector will forget about you. Collectors maintain a right to sue for the debt long after the credit report record and statute of limitations expire. If your collection accounts have large balances, this risk is increased.

5. What if I have other debts, too? If you have credit card debts or other high interest debts that are currently active, you might want to pay those off first. Those collection accounts should be repaid, but it isn't urgent.

6. Will my credit score improve by paying off collections? Unfortunately, no. Payment doesn't impact the way that collection accounts impact your credit score. You have to wait for the accounts to expire before you see the score improvement. However, having the accounts marked as paid can improve your chances of getting a home loan and will make your credit look a little better to landlords and employers.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.

Comments

[MIke Clover]

Hi Emily,
Good answers. I wanted to correct you on one thing though. Your credit score can actually improve after you pay off a collection. The balanced owed goes away, and the collection either says paid in full or settled, depending on your negotiations. Now there is not guarantee this will happen, but it happens quite often with our clients in the mortgage industry.

Good luck.

[Jim ~ mydebtblog.com]

A collection record is seen as a bad debt, but if you settle or have paid the bad debt, it's a bad debt made good. Obviously the best thing would be to avoid having anything going into collections.

[Emily Davidson]

In general, your credit score will not improve when you pay a collection account. The only improvement could come if the amount you owed was significant enough to impact your debt category.

[Ron]

I am caught in the payday loan circle what is the best way to get out of that circle in a dignified manner

[Emily Davidson]

Do everything you can to get the payday loan paid off as soon as possible. You might need to sell somethings on ebay, hold a garage sale, even skip a payment on another debt...