What Really Happens When Your Bill Goes Into Collections

In ye olden days, people were routinely tossed into debtors' prisons for bills in arrears. And, just this month, the ACLU charged that private debt collectors around the country have manipulated local courts and prosecutors' offices to resurrect the practice today.

The shame that comes with being unable to pay a bill can be bad enough without the stress of being locked up for it. If you've been contacted by a creditor or collector, the first thing to do is to not freak out. You're not alone: Last year, the Consumer Financial Protection Bureau (CFPB) found that one-in-three people with a credit record had been contacted by a creditor or collector.

Here are a few things to know if you're facing this issue and are wondering where to start.

The most basic thing to know about a collector is that they're calling to ask you to pay a bill. Debts that a collector may seek can include loans (such as a car loan or student loan), and past-due bills, such as a doctor's bill or a phone bill.

"When you haven’t paid a bill for a certain amount of time, typically a few months, that service provider can send your account to a third party that deals with the effort of getting that debt from you," explains Lisa Rowan a lifestyle and personal finance expert at The Penny Hoarder. "That outside company is a collections agency that specializes in getting people to pay their bills, and they can often be aggressive."

Some laws have been established to prevent debt collectors from harassing people who owe money, so don't feel like you have to be silent about shady tactics.

"Don't panic!" Rowan advises. "Yes, they want your money, but debt collectors are not permitted to harass you or even call you outside of reasonable hours of the day. Before you respond to a late notice or call from a collector, go through your files (contracts, bills, estimates) and make sure you are informed about your situation. Think about some options, whether it be a payment plan or a lump-sum negotiation offer, before you call back or respond by mail."

She also advises tamping down on worst-case scenarios by talking to a trusted friend or family member who can help you look over any paperwork with you, or sit in on a phone call.

Contact your service provider (a doctor’s office, for example) directly instead of waiting for the bill to get sent to collections as many companies will offer payment plans, Rowan advises. If you're unable or too freaked out to make a plan with the company, commit to making one yourself.

"Partial payments won't stop the overdue notices from coming, but showing progress on your balance can prevent your bill from going to collections," she adds. Once you get going, you might help your case by taking a deep breath and calling or writing to the company to let them know you are making progress and will keep doing so until you're back in the black.

Debt collectors can report your unpaid debt to the major credit bureaus, who mark them on your report as delinquencies. Rowan says an unpaid bill can affect your credit score for up to seven years. That's a long time — but it's not forever.

Remember that an important factor of determining your credit score is your credit saturation limit: the ratio of total available credit you have to the amount you use. That ratio is ideally 30% or less. When you pay off debt — whether it's in collections or not, Rowan says — you are actively reducing that utilization rate. So focus on knocking out as much as you can, as soon as you can.

"When that negative mark finally comes off your credit report, you’ll likely see an increase of about 14 points on your credit score, according to a study FICO conducted on its own data," Rowan says.

You'll have more success doing so if you keep track of your paperwork. Before you speak to someone to set things straight, gather any records of what you spent and what you owe, Rowan says. Doing so will make it easier to avoid being steamrolled over the phone.

"It's easy to get overwhelmed, but having whatever information handy can help you keep your cool and know where you stand," she explains. "So don’t throw out past-due bills, even if you know you can’t pay them right now. You need to be aware of the original charges and any late fees."

If you're seeking a payment plan, be realistic rather than appeasing, she adds. Don't succumb to pressure to pay everything upfront if you simply can't and keep in mind what you can really afford to pay.

"There may be fees for breaking the bill up into parts or accruing interest you'll need to keep in mind. For instance, if a bill collector wants you to pay $200 per month when you know you can only send in $150 per month reliably, tell them that," she says. "They'd rather get a smaller amount of money on a regular basis than have you flake on a payment plan."

Finally, Rowan adds, you may also be able to drive a hard bargain by paying a large fraction of the full sum upfront in exchange for the full cost being forgiven. For example, if you owe $1,500 on a late bill but have $1,000 in your savings account, you can inquire about paying them that money on the terms that the bill goes away forever.

"Ask about it," she urges. "They just might accept the offer. A business would rather wait a little while and get all the money it's owed" — you choosing to work out a payment plan directly with them, for example — "but the debt collection game is about making as much money as quickly as possible. A collector may take a smaller amount in exchange for being able to mark your name off the list."

If they accept your terms, pat yourself on the back — and make sure to get whatever agreement you make in writing.