How to Deal with Debt Collectors When You Can’t Pay

It can be scary and intimidating when the debt collector calls. Their threats are designed to make you pay them when they say things like “we can take you to jail” or “we’re going to send law enforcement to your job” or even “when you go to jail, child protective services will take your children away.” Sometimes they may even try to make you think they’re a law firm or local law enforcement.

Here are some tips and tricks to help you deal with debt collectors when you just don’t have the money to pay them.

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It’s important to know your rights

Debt collectors are experts at playing with your emotions. Don’t let them, and don’t panic. There’s still hope.

Knowing your rights is the first step to understanding what protections are afforded to you against unfair, unscrupulous practices by debt collectors.

The Fair Debt Collection Practices Act (FDCPA) protects your rights as an individual. Enacted in 1978, it was designed to establish legal consumer protection against abusive, deceptive and unfair debt collection practices.

The FDCPA applies only to third-party debt collectors and not the collectors connected with the original creditor. It typically covers personal, family, or household-related debt and doesn’t apply to debt by businesses and individuals for business purposes.

One way to protect yourself and make sure the rules are enforced is to let debt collectors know that you are aware of your rights. There are both state and federal laws to protect you. Any violation will be documented and sent to the Federal Trade Commission, the Consumer Financial Protection Bureau, and your state attorney general’s office.

The rules for the Fair Debt Collection Practices Act will vary by state. For instance, if you live in California, they will have state-specific consumer protection laws that mirror the FDCPA, and these rules will apply to the loan originator. Know your specific state laws by contacting your state attorney general’s office or local legal aid office.

What is the statute of limitations on your debt?

The good news is there is a statute of limitations on how long they can try to collect old debts. The clock starts when you miss a payment. The statute of limitations will depend on the type of loan and which state it originated from.

For instance, in Nevada, it can be four years for an oral agreement and six years for a written one. But in New Hampshire, it is three years for both. Research your specific state.

How to stop a debt collector from calling your work or home

The third-party debt collectors are only allowed to contact you within the hours of 8 a.m. to 9 p.m. They are not allowed to call your place of work if you tell them that you’re not allowed to receive calls at your place of work. Additionally, tell them that they cannot contact you at your home address and phone number. If the debt collector contacts you anyway, report the company.

Ensure you document all conversations with your account number and the dates and times the collections agency contacted you.

To stop a debt collector from contacting you altogether, you will need to send a certified return receipt letter to the collection company, instructing them to stop corresponding with you. Make sure you keep a copy. From this point on, they have to stop reaching out to you. They can only contact you if they plan to file a lawsuit against you. If you have an attorney, notify the debt collectors to direct all correspondences to your legal counsel.

If they catch you off-guard on the phone, it can be as simple as saying, “I prefer to pay the original creditor. Give me your company name, contact information and I will send a cease-and-desist letter.”

Here’s a link to some sample letters to debt collectors.

Protect yourself by asking them to send you a debt validation letter. You are within your rights to dispute all or part of the debt separately, and you are entitled to request this debt validation letter. The debt collector is legally obligated to respond.

What is a debt validation letter?

The debt validation letter is a letter the debt collector sends you to prove you owe them money. It helps you confirm legitimate debts and ensure that you’re not dealing with a scammer. It shows the debt details, like what you owe, to whom, and when to pay.

Under the FDCPA, debt collectors are required to send a debt validation letter to inform you that you are within your rights to dispute the debt. When the debt collectors reach out to you to collect money, they are supposed to let you know the creditor’s name, the amount of money owed and inform you that you can request the information from the original creditor.

What if the debt collection agency fails to comply?

If the debt collector refuses to comply, report them to the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), and your state Attorney General’s office. You also can send them what’s known as a Debt Verification letter, requesting that they validate your debt.

File for Chapter 7 bankruptcy

Filing for Chapter 7 is one option if you are unable to repay your debts. This could feel like rock bottom to you. You’re probably feeling emotionally overwhelmed, broken, and terrified. But it could also be a fresh start. Hitting rock bottom is sometimes necessary before you can rebound.

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is the most common type of bankruptcy. Chapter 7 is known as liquidation bankruptcy and involves selling some assets or property to pay off debt. Chapter 7 is a good choice if you don’t own a home and have limited income.

In 2020, according to the U.S. Courts, there were approximately 535,000 bankruptcy filings. Chapter 7 filings made up about 379,000 of those, and about 156,000 were Chapter 13 filings.

Chapter 7 wipes out the following unsecured debt: credit card debt, medical bills, personal loans by unsecured debt, unpaid utilities, phone bills, secured debt like car loans, and judgments from unsecured debt.

However, Chapter 7 bankruptcy will not wipe out the following: taxes from the last three years, alimony or child support, debt related to divorce proceedings, debt from such personal injury cases as a DUI, the money you own Uncle Sam, and court fines and penalties.

Before you can file Chapter 7 bankruptcy, you’ll need to complete a bankruptcy means test. The means test determines whether you’re eligible to file for a Chapter 7 bankruptcy. It considers your income, expenses, household size and whether you have enough disposable income to pay off your debt.

One way to know if you will pass the means test is if your gross income based on the six months before filing bankruptcy is below the median income for your state, and you can’t have filed Chapter 7 in the previous eight years.

If you own property, your property will go into a bankruptcy estate held by a court-appointed trustee. If you are behind on mortgage payments, you will most likely lose your home. But this filing will temporarily halt foreclosure proceedings for a few months. Filing for Chapter 7 doesn’t allow you to catch up on late payments. And because a mortgage is a secured debt, the Chapter 7 bankruptcy filing will not wipe this out.

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Chapter 7 bankruptcy can erase unsecured debt like credit card balances, medical bills, and personal loans. It stops collections actions, wage garnishments while keeping your retirement accounts intact. Your debts are discharged about four months after filing, so you can start to rebuild your credit scores immediately.

How will filing for bankruptcy affect your credit?

A Chapter 7 bankruptcy stays on your credit report for ten years, it will lower your credit score, and after 4-5 years, you may be able to get back up to a 700-749 score. So, it does have long-term loan implications, and as the bankruptcy-related accounts start to fall off, the impact will be lessened on your credit report.

A Chapter 13 bankruptcy is a reorganization. Chapter 13 is for someone with a regular income. The filer will repay all or part of their debt through a payment plan over three to five years. Therefore, Chapter 13 will take longer to rebuild your credit.

One benefit of Chapter 13 is that it only stays on your credit report for seven years instead of ten because you’re being rewarded for paying back some or all of your debt.

In general, neither Chapter 7 nor Chapter 13 bankruptcy will discharge student loans. To get a student loan discharged, you’ll have to prove that repaying the debt “will impose an undue hardship on you and your dependents.”

Consult an attorney

If a debt collection agency is hounding you, it’s a good idea to consult an attorney before considering filing for bankruptcy. Many law firms offer an initial free consultation. The bankruptcy attorney can help you assess your financial situation, the types of debt you have and advise you if bankruptcy or which type is best suited to your situation.

Not to mention that bankruptcy can be a long, confusing and emotional process. Hiring an attorney can alleviate some of that mental strain.

Visit The American Bar Association for a searchable bankruptcy lawyer database for each state.

Try DIY debt relief

You will have to be an excellent negotiator for this type of do-it-yourself debt settlement.

It’s essential to know the maximum amount you can afford as a monthly payment and the exact date you can pay. Or you can try to negotiate to pay one lump sum.

Be prepared for negotiations

Make sure you have all of the debt collector’s contact information. Before you speak to them, do some research. Know what to say and what not to say. If the debt collectors catch you off guard, tell them to call you back at a specific day and time, making sure to give yourself enough time to do your research.

Start with an offer of 10% to 40% of what your maximum amount is that you can afford. Know when to stop. Assess your current financial situation to get a good idea of what you can afford to pay. It does no good to agree to pay more than you can afford.

Call the creditor or agency directly, or answer their phone call

You can call the debt collector directly through a phone call, or wait for them to contact you. If the debt collector calls you, call them back after you have done some homework. Do not ignore them because the problem will only get bigger.

Document the date, time, and name of everyone you spoke with and in the order you talked to them. Be sure to confirm that they have the authority to accept a debt settlement agreement. Make sure that you are in control of the conversation. Say as little as possible, and don’t volunteer anything. Know your rights.

Don’t let them bully you into making a payment with promises that the settlement offer they are proposing is a one-time deal and won’t be available after a specific time.

Want a few extra tips on how to deal with debt collectors? Watch this to learn more:

What to do if the debt collector accepts your settlement offer

First off, you want to make sure that it is not a scam. Check to ensure the company is legitimate and the debt is yours. Tell them that you will send a letter with details to confirm its contact information and mailing address.

Your letter should include the specifics of the agreement, the date of the contract, and the name of the person who agreed; include your account number. If they request banking information, do NOT provide it. That will come later.

Send this letter via certified mail with a return receipt and make a copy of the letter before you send it. Save all receipts and documents.

When you receive the settlement agreement, it will include the settlement terms. Do NOT send blank checks.

Check with the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) to see if any complaints have been filed for the company.

When they make a settlement offer, try to negotiate a better deal. Once in agreement, get the settlement terms in writing and ensure that the remainder of the balance owed is canceled after you make payment.

Lastly, ask the creditor to remove the negative information from the credit reporting companies once your debt has been paid. Review your credit reports with all three major credit bureaus, Experian, Equifax and TransUnion, to make sure it shows that it is settled or marked paid as agreed.

If you have more than $600 in debt that was canceled, there may be some tax implications the following year — consult your accountant.

Be aware that it may not be settled immediately, and the negotiations could take several days.

Tip: If the debt is older, make sure the debt collector isn’t using it as a ploy to make you make a partial payment to get the statute of limitations to reset on what’s called a time-barred debt, or debts that are too old for creditors to sue you for collection.

Try a debt management plan

A debt management plan (DMP) is an agreement between a debtor and creditor to set up a repayment plan managed by a third-party credit counseling agency.

Look for a nonprofit group offering a free consultation and accredited by the National Foundation for Credit Counseling. They will look over your financial situation and discuss several options, not just the debt management plan. Do not feel obligated to commit to a plan on the spot.

When you sign on, your counselor will contact each of your creditors and negotiate lower interest rates and lower monthly payments. You won’t pay the full amount of your debts. The debt counseling agency will accept your monthly payment and pay the creditors per the payment agreement. There is an enrollment fee and a monthly fee per account, and agencies charge on average between $20 to $30.

You will not have any credit cards to use while you are in the program. You might be able to keep a card for emergencies or business. Ask your credit counselor.

When you are paid in full, your credit report should show the debt “paid in full.” Double-check this is reflected for all three credit reporting companies.

Keep in mind, just because you have an updated status of “paid in full,” this will not bring your credit score up. Because the debt had gone into collections, it will remain on your credit report for seven years from the date that your account became past due.

But since your account is paid, it avoids any judgment against you, which could hurt your credit scores even more. Some mortgage lenders will require you to settle the collections before they give you a mortgage.

The bottom line

It’s hard when strangers start calling your home and work to hound you about your unpaid debts. Personal finance is a personal issue. But there’s still hope. Know how you can push back, how to protect yourself, and what options are available to you for a possible fresh start.


What happens if you ignore a debt collector?

If you ignore a debt collector, chances are they will file a collections lawsuit against you in court. If they win through a default judgment, they can garnish your wages, take money out of your bank account and seize personal property.

What should you not say to a debt collector?

Don’t give them your personal or financial information, and don’t admit the debt is yours. Keep your lips sealed. Debt collectors will ask for certain information to confirm your identity and claim ownership of the debt. Make sure to tell them that you will only communicate with them through writing and your attorney. Most importantly, don’t lose your temper.

Can I go to jail for not repaying my debt?

No, you cannot go to jail for nonpayment of a debt. There are a few exceptions like violating a court order, not paying income taxes, or if you don’t appear for a debtor’s examination. A debtor’s examination is a particular proceeding under oath about your finances, where creditors look to collect from you via wage garnishment or bank levy.

How can I get out of paying debt collectors?

You can get out of this if you will never have any income or assets, which is probably not practical, or your outstanding loan that is a year or two old, then you shouldn’t pay it. Paying it may only hurt your credit further.
You can also write a letter of goodwill asking for loan forgiveness, read up on the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) and craft a dispute letter challenging the collections. Lastly, you can have a collections removal expert delete it for you.

Can student loan debt be discharged by declaring bankruptcy?

Student loans are difficult, but not impossible, to discharge in bankruptcy. To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”

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