Navigating Debt Collections: Should You Still Pay Your Debts?

When a debt goes to collections, the decision to continue making payments may seem daunting. However, understanding the implications of continued payments or the lack thereof can provide clarity on your options and the potential outcomes for both you and your credit score.

Understanding the Impact of Payments on Debt Collections

One of the key factors in dealing with debt collection is whether or not to make payments. Making any payments, even if they are late or minimal, can help ‘freshen’ the debt and prevent the statute of limitations from resetting. This means the debt collection agency can still potentially sue you for the debt if you stop making payments. This can create a situation where you are in a perpetual cycle of debt without a clear resolution.

Options When Debts Go To Collections

Given the consequences of unsecured debt, you might find yourself considering several options, including bankruptcy, debt reorganization, and debt settlement. Each option has its own set of advantages and drawbacks.

Bankruptcy

Chapter 7 Bankruptcy: This type of bankruptcy involves liquidating your non-exempt assets to pay off your debts. After the process, any remaining unsecured debts are discharged. However, this process is not as straightforward as it once was. You will need to pass a ‘means test’ to determine if you can afford to repay any part of your debt. If you cannot, you may be eligible for Chapter 7. Though, your credit score may take a significant hit due to the bankruptcy filing.

Chapter 13 Bankruptcy: This form of bankruptcy involves reorganizing your debts and paying back a portion of your debts over three to five years. While this option does not discharge your debt completely, it can help you avoid bankruptcy, which may otherwise impact your future financial credibility. However, you will still need to pay back the full amount of the debt, including interest and any late fees. After successfully completing the repayment plan, a portion of your debt may be discharged.

Debt Settlement

Debt Settlement: This is another option where you seek the help of a professional debt settlement company to negotiate with creditors for a reduced amount to settle your debt. These companies can help you negotiate with creditors and manage a monthly payment plan that might be more manageable for you. However, this method is not without its risks. For instance, your credit score might not be as negatively impacted as with bankruptcy, but the settlement can result in a significant hit to your score.

In addition, the specific terms of the settlement depend on the amount of debt you owe. If you owe less than $10,000, some debt settlement companies might not take your case because there is no profit in it for them. Creditors like certain military-issued cards, such as Navy Federal Credit Union, Star card, and Discover card, may not settle for less than the full amount owed or will have very high settlement payoffs. However, if the debt is nearing the end of the statute of limitations, these creditors may be more willing to settle for an amount less than the full debt.

Finding Professional Help

When considering debt settlement, it's important to do thorough research and find a reputable company. You can start by searching for 'debt settlement in my area' or consulting with a financial advisor. Be wary of companies that guarantee a certain amount of debt will be settled or that charge high upfront fees. Instead, look for companies that offer flat service fees or a percentage of the debt settled.

Preventing Future Debt

To prevent your debts from going to collections in the future, it's crucial to maintain a budget and stay on top of your payments. If you find yourself overwhelmed with debt, consider seeking professional advice from a credit counseling agency. These agencies can help you create a budget, negotiate with creditors, and avoid future debt problems.

Conclusion

Debt collections can be a complex and stressful situation. Understanding the options available and the potential outcomes can help you make informed decisions. Whether you choose to make continued payments, file for bankruptcy, or seek debt settlement, it's essential to consider the long-term impact on your financial health and credit score.