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You can pay off old debt by either paying it as a lump sum, establishing a payment plan or settling the debt with the collection agency.
Paying off an old debt that has gone to collections requires that you make decisions about your current financial situation. Before anything else, you’ll want to verify the amount and validity of the debt. If the debt is yours, you’ll need to pay it, though you may be able to set up a payment plan or settle with the debt collector.
You don’t want to ignore debt collectors, who may be able to file a lawsuit against you if you fail to work toward paying a debt. You’ll want to consult an attorney and financial advisor, as the statute of limitations for debts varies by state. If the statute of limitations has run out on a debt, a debt collector won’t be able to successfully complete a lawsuit against you.
If you are facing a long-overdue account, read on to learn how to pay off old debt and work toward rebuilding your credit score.
Step 1: Verify the debt
Before beginning to make any payments on old debt, you’ll want to verify that the debt is actually yours and that the amount of the debt is accurate. Some unsavory debt collectors are known for illegal debt collection practices, like phantom debt collection—which is misrepresenting the balance of an unpaid debt.
To verify the debt, you’ll want to contact the original creditor as well as the collection agency to ask for proof that the debt is valid. In some cases, asking for verification is enough to make an old debt disappear if the debt wasn’t legitimate to start with. Additionally, some collection agencies try to collect debts from spouses, which may not be legal depending on your state. You may need to contact a lawyer to determine if you’re responsible for a debt.
In any case, if the debt is legitimately yours, you’ll need to get details about the current balance from the collection agency. Interest may have continued to accrue, so the balance could be different than you remember.
Once you have details about what you owe, you’re ready to make a plan to pay off the old debt.
Step 2: Consider your options for paying old debt
If you need to pay an old debt, you have several options to consider: paying a lump sum, establishing a payment plan or settling the debt.
Any of these options could be the best choice for you, so read on to learn more about each route you could take.
Pay your debt as a lump sum
The most straightforward way to get rid of an old debt is to pay it as a lump sum. However, you’ll want to keep a few things in mind before taking this approach:
- Ensure you get the lump-sum payment agreement in writing from the collection agency prior to paying.
- Consider if paying the debt quickly is the best financial approach for your situation—could the money be used more effectively in other areas?
- After paying the debt, keep documentation proving you made your payment to ensure no other agencies try to collect it.
If you have the money available and you decide to pay as a lump sum, this can be a quick way to eradicate your old debt. However, for many people, a payment plan is a more manageable way to handle an old debt.
Establish a payment plan for your debt
When paying a lump sum isn’t viable, it’s often possible to establish a payment plan with the collection agency. Make sure you have a good grasp on your finances and what you can afford each month, then contact the collection agency to negotiate a plan that works for both parties.
As with all debt payments, make sure you get the agreement in writing before making payments. Additionally, be sure that you can stick with the commitment you make, as failing to make timely payments could invalidate your payment plan.
If the debt amount feels completely unmanageable, you may want to consider debt settlement as an option.
Settle the debt with the collection agency
If you simply cannot pay the full amount of your debt for any reason, debt settlement is an option, but there are drawbacks to this approach.
Debt settlement is the process of negotiating the total balance of your debt to a more manageable amount. If you’re going to attempt this route, you’ll want to know the following:
- Be certain that you have the debt settlement agreement in writing before making any payments.
- Be careful that the collection agency won’t sell the remainder of your debt to another collector.
- Be mindful that the amount of your debt forgiven may be considered taxable income, so consult with a tax attorney.
- Be aware that the debt collector may not report the debt as paid in full to the credit bureaus.
While debt settlement can reduce the overall burden of an old debt, it can be difficult to arrange. If you decide to pursue this route, you may want to consult with a credit counselor or financial advisor before contacting the debt collector.
Regardless of how you decide to pay your debt, you’ll likely need to work to rebuild your credit after working with a collection agency.
Step 3: Rebuild your credit after paying off old debt
If you have an old debt that has gone to collections, it may continue to have implications for your credit. In general, the negative item from a collection account can stay on your credit report for up to seven years. Additionally, paying off the account, while important, may not have an immediate positive effect on your credit score.
Other negative items associated with an old debt—like missed payments or charge-offs—can also linger on your report and continue to negatively affect your score.
However, rebuilding your credit after having an account go to collections is possible with time and dedication. By building positive new credit habits, like on-time payments and lower credit utilization, your score is likely to go up over time. As older negative items fall off your credit report, your new positive credit history will have a larger impact on your score.
Throughout this process, it can be helpful to work with a credit repair consultant who can review your report with you, help you dispute inaccurate information and provide credit score monitoring services.
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