Whenever you have a debt that you cannot pay, that debt has a chance of being sent to collections.
Being "sent to collections" isn't quite the formalized process it sounds like, though. Collections agencies, or debt collectors, are simply companies that buy debt from entities like healthcare facilities, banks, and landlords. Unsecured debt (that is, debt that isn't attached to an asset that can be repossessed) can be purchased by these companies.
These companies buy debt for pennies on the dollar. A bank or other entity is willing to take this deal because getting some small percentage of the money is better than spending their own money trying in vain to recover the money from you. The debt collector does that as their sole job; a hospital might not even have people who have the time to try it.
That's also how debt collectors make their money: since they bought your debt for 2% of its value, they can recover the full value – or even accept less than full value – and still make a profit.
Debt collectors are often quite difficult to handle. Throughout history, they've been anything from purely business to "hunt you down and break your legs" levels of dangerous. Modern debt collectors, thankfully, have to obey a ton of different laws that regulate their behavior.Let's get started!
Debt collectors use a lot of different methods to try to get money from you to repay your debts.
For example:
Obviously, an unpaid debt on your credit report is bad. Even if you pay it, the blemish lasts up to seven years before it falls off of your report. That's a lot of long-term damage for something that may have been as minimal as a temporary financial hardship.
Did you know, though, that there's no actual rule that requires debt collectors to report debts to the credit bureaus? Most will do it as a form of threat to get paid, but it's not legally required of them.
That's where a "pay for delete" comes into play. What is it, though?
A "pay for delete" is a form of negotiation with a debt collector. It's an offer: if you repay the debt, either in full or as an agreed-upon partial payment, the debt collector will wipe the slate clean and cease reporting the debt to the credit bureaus. The blemish is removed from your credit report, so your score goes up, and you don't have to suffer seven years of hardship over a bit of bad luck.Sounds like a winning offer, right? If you can afford to pay off the debt, having it wiped from your credit report is great for your future financial stability.
Unfortunately, there are a few problems with this practice.
The first issue is that, while a pay for delete could potentially remove the blemish caused by the debt collector, that's all it does.
If you had a credit card bill go into collections and linger delinquent long enough that it's sold to debt collectors, that's a blemish on your credit report, reported by the credit card company. Nothing you can do can remove that blemish other than waiting the requisite seven years.
The debt collector's reporting adds a second blemish that can be removed, but that doesn't remove the original blemish.
While we hesitate to say that a pay for delete is illegal, it can be said that they aren't entirely above-board. However, it's not your problem; it's the problem of the credit reporting agencies.
Under the Fair Credit Reporting Act, the credit reporting bureaus are required to report accurate information about your credit. They cannot use an excuse like "we're just reporting information we're given" and wash their hands of any problems.
Picture this: someone is applying for a credit card. You're responsible for reviewing their credit history, and while it has a couple of blemishes, they have no recent collections accounts, so you approve them.
That individual actually just recently had an account in collections, but they negotiated a pay for delete, so it wasn't on their report. Now, you've approved a credit card for someone who has a much greater level of risk than you would normally approve. All because their credit report was inaccurate.
That's the tricky situation that various financial institutions and credit bureaus are put in when a pay for delete comes through. It's a gray area; while the credit bureaus shouldn't report things that aren't verified with them, they also shouldn't "sculpt" a credit report in such a way either.One of the biggest problems with a pay for delete is that a debt collector can happily agree to it and then, once you've paid the debt, simply not remove the blemish at all.
Since pay for delete agreements aren't formalized contracts, they aren't a legally-recognized process, and they go against accurate credit reporting rules, you're left without recourse. You can't really sue a debt collector for accurately reporting your credit information and not upholding their end of an unenforceable bargain.
All of this means that a pay for delete isn't really a valuable process these days.
There's one other quirk of the credit reporting system that makes a pay for delete an even less valuable process to try: it doesn't matter in the first place.
Above, we mentioned that a debt collector typically ends up adding a second blemish to your credit report attached to the same debt. In fact, if you ignore a debt collector long enough, they may even sell the debt to another collector, and it can change hands multiple times: the same debt could end up with several entries in your credit report.
In the past, this was devastating. Pay for deletes were often seen as one of the only ways to handle such a situation.
Today, even if you get a pay for delete, the original debt going to collections is still reported, and you'll never get a bank, landlord, or other entity to agree to a pay for delete for a debt they no longer own.
There's one major reason why this isn't a huge problem, however: modern credit scores take it into account.
Or, more specifically, they don't take it into account.
Specifically, the newest version of FICO, FICO 9, and the latest VantageScore 3 both simply ignore most debt collectors… if the account is paid.
Essentially, a pay for delete is built into the credit reporting system now. You don't need to negotiate one because it's simply the default behavior.
There's one caveat, however. That is, it only applies to the latest credit scoring models. There are plenty of agencies out there, like mortgage lenders, who still use older versions of FICO like FICO 8 instead of FICO 9, and as such, still see the hit to your credit that a paid collections account gets you.That's why we can't simply put the concept of a pay for delete behind us; we need to wait for the whole financial industry to catch up.
Yes and no.
Right now, a pay for delete may be able to raise your credit score slightly. It cannot fully remove the blemish caused by an unpaid debt since the original creditor will still be listed with a debt that was sent to collections. However, knock-on debts from collectors can be removed.
While modern scoring doesn't much care about paid collections accounts, if you're specifically seeking a mortgage, car loan, or other financing, it might still be relevant.
However, a pay for delete is somewhat risky in that while you can negotiate the agreement, it's not legally binding, and the debt collector doesn't actually have to honor the agreement. Since all they care about is getting money out of you, they'll often promise anything they feel like if it gets you to pay, with no intention of upholding it.
So, while you can negotiate a pay for delete, the more important part is negotiating a settlement. A pay for delete is often an agreement to pay a partial sum of the debt in order to call the debt cleared; if the debt collector agrees to it, you've essentially negotiated a partial payment. Of course, every step of the process should be documented in writing in case someone else tries to collect on the same debt later.
Rather than simply jumping to a pay for delete offer, there's a whole process to follow to handle an account in collections.
The first thing to do is send a letter requesting verification of the debt. A debt validation letter is a request to the debt collector, requiring them to prove that the debt is legitimate and that you owe the amount stated. Under the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, you're legally protected if a debt collector can't validate a debt.
Specifically, look for errors or misreporting. For example, if you paid a credit card bill, but the bank misapplied the payment and eventually sent the account into collections, you may be able to prove that you paid the debt and that it's a bank error. Similarly, medical accounts that should have been covered by insurance but slipped through the cracks can also cause these issues. If you can verify that you're not responsible for the debt, they can't collect on it.
If your debt is truly in error, you can file a dispute with the credit bureaus. If you can prove that you aren't responsible for the debt, it can be wiped from your credit report as part of the fair credit reporting standards. Accuracy goes both ways, after all.
If a debt collector is overly aggressive or violates rules about debt collection practices, you can file a complaint against them. The Fair Debt Collection Practices Act specifies conduct for debt collectors, including what hours of the day they can call, what information they can and cannot provide, and more. If they violate these rules, they can be subject to fines, lawsuits, and other penalties.
If the debt is yours, it's validated, and it's accurate; it's your responsibility to pay. However, you may be able to negotiate a settlement and pay a partial value to wipe the slate clean. Debt collectors are often more than happy to accept a partial payment, though some will not; it all depends on the collector specifically.
If all else fails and you have no way of repaying a debt, you can also simply ignore it. The blemish will linger on your credit report for seven years, and that's detrimental to your credit, but it will eventually fall off of your report. It's not the ideal option, but it's the final option.
Dealing with debt collectors is stressful enough. A pay for delete may not be worth the effort, especially when modern credit scores don't count paid accounts anyway. Depending on your circumstances, it may be a useful technique, but it's often just easier to pay the debt without all the paperwork and negotiation.
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