What Happens if You Don’t Pay a Debt Collection

Collection accounts and your credit report

If you have an account sent to a collection agency, your credit history has already taken a hit. Every month your creditor has been reporting missed or late payments to the credit bureau. Once the account goes to a debt collector, the debt is marked as a collection account.

Collection accounts significantly hurt your credit score and will do so for several years whether you pay them or not.  According to Equifax, Canada’s largest credit reporting agency, a debt in collection won’t be removed from your credit report until six years after your last payment date.

The problem with making a payment to the collection agency is that this new payment will reset how long that account will stay on your report.

To explain, here is an example:

You have an outstanding credit card bill that you haven’t made a payment on in two years; based on credit reporting rules, it will automatically disappear from your credit report in four more years.

You have the money, so you decide to pay the debt collector. Since debt collectors report activity to the credit bureaus, doing so creates a new ‘last payment date.’ Once you pay the collection agency, the debt will remain on your credit report for six more years, two years longer than not making a payment.  Even if the collection agency agrees to accept less than the full amount owing, it’s still on your credit report for six more years.

In other words, paying a collection agency can mean the debt will affect your credit score longer than not paying.


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How Do Collections Affect Your Credit?

Once your overdue debt is handed over to an internal or external debt collector, this action probably will pop up on your credit reports. A collection account on your credit can lead to a significant drop in your credit scores. It’ll take seven years for accounts that have gone to collections to fall off your credit reports.

What Debts Can Go to Collection?

Any outstanding bill you haven’t paid can be sold or assigned to a debt collections agency.1 Here are the most common debts sent to collections:

  • Credit card
  • Car loan
  • Medical/hospital bills
  • Student loans
  • Mortgage payments

But don’t worry, it shouldn’t ever be a surprise. (If it is, you might be dealing with a case of zombie debt.) In most cases, you should expect a letter letting you know your bill is now in collections. But that doesn’t make it any less scary.

Protecting Yourself

If you believe you’re being contacted by a scammer, don’t wait to report them to the Federal Trade Commission and your Attorney General’s office. Always make sure you contact the original creditor of the debt in question and ask what companies they’ve authorized to collect the debt on their behalf.

This is a sure way to know if you’re dealing with a fake debt collector. We repeat: Never give out your personal or financial information without verifying who you’re talking to. This will save you money and headaches in the long run.

Debt collectors break the rules, and they’ll try to break you in the process. It’s important to collect yourself and get your budget and finances in order before you go making any deals with collectors. Book a free coaching call with a Ramsey Preferred Coach to get motivation and money advice we stand behind. They'll help you start figuring out a plan to get rid of debt (and collectors) for good.

It’s not easy dealing with debt collectors. But there’s still hope. If you know what they can and can’t do, and deal with them in the right way, you can get back on the path to debt freedom and some peace and quiet.

Job Hunting

Some employers check credit reports on potential employees. Having a collection on your credit report can keep you from getting hired, especially with financial jobs or upper-management-level jobs. In order to view your credit history as part of a background check, employers must receive your written permission. You could refuse to grant permission, but this is unlikely to reflect any better on your candidacy than a poor credit report.

Employers also cannot turn you down for a job based on information in your credit report without giving you a copy of the report, just as lenders are required to do when rejecting a loan application.

2. Right to know the debt collector or debt collection agency

Under the FDCPA, debt collectors are required to identify themselves when they attempt to collect a debt as well as note that any information you give them will be used in an attempt to collect the debt. They also must give you the name of their company or agency. Legitimate collectors should be able to give you a business address and contact information, too.

If a debt collector has given you their name and identifying info but you’re still suspicious, you may be able to find more information about the collector via your state’s attorney general’s or consumer affairs office.

Will a debt in collections eventually go away?

It technically doesn't go away, but each state has a statute of limitations on how long a debt can be collected. Once that date passes, your debt is time-barred. You may hear from a debt collector about the debt, but they can't sue you for the debt because of the time limit.

4. Right to privacy of your personal information

Debt collectors are limited in what they can say or ask about you to other people. (They also can’t contact those people more than once.) That information is typically limited to …

  • Where you live
  • Your phone number
  • Where you work

Debt collectors can usually only speak to certain people about any debts you owe.

  • Your spouse
  • Your parent (if you’re a minor)
  • Your guardian, executor or administrator
  • Your attorney (if that attorney is representing you for that particular debt collection)

What To Know About Old Debts

What if my debt is old?

Debt doesn’t usually go away, but debt collectors do have a limited amount of time to sue you to collect on a debt. This time period is called the “statute of limitations,” and it usually starts when you miss a payment on a debt. After the statute of limitations runs out, your unpaid debt is considered to be “time-barred.”

If a debt is time-barred, a debt collector can no longer sue you to collect it. In fact, it’s against the law for a debt collector to sue you for not paying a debt that’s time-barred. If you do get sued for a time-barred debt, tell the judge that the statute of limitations has run out.

How long the statute of limitations lasts depends on what kind of debt it is and the law in your state — or the state specified in your credit contract or agreement creating the debt.

Also, under the laws of some states, if you make a payment or even acknowledge in writing that you owe the debt, the clock resets and a new statute of limitations period begins. In that case, your debt isn’t time-barred anymore.

Can a debt collector contact me about a time-barred debt?

Sometimes. It depends on which state you live in. Some state laws say it’s illegal for a debt collector to contact you about a time-barred debt. But even if you live in a state where a collector may still contact you, they cannot sue or threaten to sue you over a time-barred debt.

If you’re in a state where a debt collector can still contact you about a time-barred debt, they can keep contacting you by phone, email, or letter to try to collect what you owe. If you want to stop a collector from contacting you, send your request by mail.

If you live in a state where a debt collector can’t contact you about a time-barred debt — and they reach out to you — report it.

What if I’m not sure if my debt is time-barred?

Start by asking the collection company what its records show about when you made your last payment. When you have that information, contact your state attorney general’s office and ask them for the statute of limitations on your debt. You can also contact a legal aid office in your state, or research that information online.

If the statute of limitations has run out, your unpaid debt is considered to be time-barred.

When asking about your debt, remember that in some states, if you acknowledge in writing that you owe the debt, the clock resets and a new statute of limitations period begins.

Does a time-barred debt stay on my credit report?

Yes. Negative information — like past-due debts — can generally stay on your credit report for seven years.

Do I have to pay a debt that’s considered time-barred?

It’s up to you. Consider talking to an attorney before you decide. You can:

  • Pay nothing. The collector can’t sue you, but can keep contacting you unless you send a letter by mail telling the collector to stop contacting you.
  • Make a partial payment. In some states, if you pay any amount on a time-barred debt, or even promise to pay, the debt is “revived.” That means the clock resets, and a new statute of limitations begins. The collector might be able to sue you to collect the full amount of the debt, which may include extra interest and fees.
  • Pay off the debt. Some collectors will accept less than what you owe to settle a debt. Before you make any payment to settle a debt, get a signed letter from the collector that says the amount you’re paying settles the entire debt — and you no longer owe anything for that debt. Keep the letter and a record of any payments you make to pay off the debt.

Remember that paying off an old debt may not erase it from your credit history. Also, if you settle the debt, some collectors will report that on your credit report to show you didn’t pay the full amount.

What should I do if I’m sued for a time-barred debt?

Don’t ignore the lawsuit. Consider talking to an attorney. Show up on the day of your case and tell the court the debt is time-barred. You will probably need to show proof of this, so plan to bring a copy of the debt information from the collector, or any information that shows the date of your last payment.

Theres no set rule on how long it takes for your debt to go to collections

Six months is the general guideline, but according to Eweka there is "no set rule" on how many times you'll get a phone call or letter before your debt is turned over to an agency.

"Sometimes, companies use collection agencies to service their debt collection process from the beginning, and other times it can take a longer amount of time," says Eweka.

Check your credit report at least once a year to reduce any surprise calls from collections, Eweka says. "Sometimes people do not even realize they have some of their debts."

The three major credit bureaus (Experian, Equifax and TransUnion) are offering free weekly credit reports for the next year. They are available on AnnualCreditReport.com through April 2021.

What to do after you make your last payment

When you finish your payment plan or complete the lump sum, ask the collection agency for a letter of completion from a company signatory. Then check your credit reports to make sure that the account has been accurately updated — but note that changes may not be reflected for 30 days. Even after everything is updated correctly, keep your records in a safe place in case any issues arise later.

Old Debts Can Cause Problems Whether You Pay or Not

At first glance, it might make sense to just pay off a debt collection agency. After all, that’s the easiest way to make them leave you alone, right?

Not exactly. Sure, paying a debt collection agency may get them off your back. But that’s all it’ll do. Evidence of the unpaid debt will remain on your credit report for another seven years. The actual amount of the debt doesn’t matter. Collections raise the same red flag on your credit report, regardless of whether the debt is for $100 or $100,000. This can affect your ability to secure loans in the future.

What’s worse, intent doesn’t matter in debt collection cases. Many debtors aren’t trying to dodge their creditors. They just don’t know they owe money. This happens all the time. A creditor may send an unpaid debt notice to a borrower’s old address. The borrower never receives it and goes on with their lives, unaware of the debt following them.

This lingering debt can have some surprising effects. It’ll make getting new loans more difficult. Securing financing for a car, mortgage, student loans, or home improvement is significantly more difficult with bad credit. But that’s not all. Bad credit can also make it difficult to rent a home or even open an online streaming account.

On the other hand, paying an outstanding loan to a debt collection agency can hurt your credit score. Yup, you heard that right. Any action on your credit report can negatively impact your credit score – even paying back loans. If you have an outstanding loan that’s a year or two old, it’s better for your credit report to avoid paying it.

Protect your credit score by filing a response with SoloSuit.

What alternatives are there to not paying a collection agency?

Consider a debt management plan

If you have the money to pay the debt and want to clear it up, you could talk with a not-for-profit credit counselling agency and arrange a debt management plan

However, you must repay your debt in full, as this is a requirement with any payment plan through a credit counselling agency. A credit counsellor cannot settle your debt for less even if the collection agency is willing to accept less than the full amount.

A new note will be placed on your credit report when you enter into a debt management plan. This note will remain for two to three years from completion.  However, some creditors continue to report your monthly payment made through a collection agency as regular transactions, refreshing the last activity date. So the debt can remain on your credit report for six years after you complete your debt management plan. Since a DMP can be anywhere from 1 year to 5 years, that one account could impact your credit history for a long time if you go through a credit counsellor.

Make a settlement offer

If you have a single old debt and want to stop the calls, consider negotiating a settlement with the collection agency.  You can offer to pay the collection agency a percentage of what you owe and ask that the unpaid debt be written off. Depending on what you can afford and how old the debt is, start at 20 cents on the dollar and see what they are willing to accept.

Be aware that your settlement payment will update the last activity date meaning the debt will remain for another six years on your report.  To avoid this, as part of your settlement arrangement, ask the collection agency to purge the debt from your credit report right away.

File a consumer proposal

If you have a lot of debt and don’t have enough money to pay all your debts in full, it may not be a good idea to settle directly with one collection agency.  You may want to consider working with a Licensed Insolvency Trustee to negotiate a deal to eliminate all of your debts.

A consumer proposal wipes out all standard unsecured debts.  Whether or not this is a viable option will depend on what other debt obligations you have, along with other factors such as your income and any assets you may own.  However, if a consumer proposal is a viable option for you, you may be able to pay less than the full amount owing on all of your debts.

A consumer proposal is also reported on your credit report.  This note is removed the earlier of six years from the date of filing or three years after completion.  Since a consumer proposal provides a stay of proceedings, it prevents your creditors from recording payments and ‘refreshing’ the six-year purge period on your debts. This means each debt included in your proposal may be removed from your credit report sooner than with a debt management plan, and you save money by paying less than you owe.