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How to Deal With Debt Collectors When You Can't Pay
11 Aug 2020

The Best Tips on How to Deal With Debt Collectors When You Can’t Pay

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The phone rings. You look at your phone and go right into fight or flight mode. You know it’s a call about a past-due debt. Your best defense is to ignore it because you can’t pay your debt.

You get letters in the mail and some debt collectors resort to calling your friends and family to collect the debt.

You need to know how to deal with debt collectors when you can’t pay. You may have just lost your job or lost a big client. Whatever your reason is, you need to work with the debt collectors.

Read on to find out how you can deal with debt collectors and resolve your debts.

Your Rights Under Collections

Some debt collectors will resort to shady tactics to collect the debt. They may make you feel like a criminal, which can make matters worse. Debt is often the cause of anxiety and depression, making dealing with debt collectors feel impossible.

The important thing to note is that you have rights, even when you can’t pay your debts. One thing to look at is the age of your debt. Your debt may be considered time-barred. That’s like the statute of limitations running out of time to sue you for your debt.

Debt collectors can’t call you in the middle of the night. They also can’t repeatedly harass you, threaten you, or swear at you to intimidate you. They also cannot lie about the amount you owe or cash a postdated check early.

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

When you’re dealing with debt collectors, your stress levels are high. There are a few things that you can do to make the situation easier. Here are a few tips to handle debt collectors when you can’t pay.

1. Talk to Them

You have to take the first step and pick up the phone. By ignoring debt collectors, you’re only making the situation worse.

You may not know what to tell them since you have no way to pay. Debt collectors can be understanding and are willing to work with you.

Let them know what your situation is right now and when you can expect to see it improve. You may have lost your job a few months ago, but you just picked up a new job that you are going to start in a few weeks.

Even if you don’t have an answer, the debt collector may be able to put a hold on debt collections activities for a few months while you improve your financial situation. They may also accept a small monthly payment for a few months and work out a plan for higher payments.

Calling the debt collector lets you take control of the situation because you know what all of your options are.

2. Pay Your Debts in Full

How can you pay your debts in full when you can’t pay your bills to begin with? There are a couple of creative ways to do that.

The first is to borrow money from your friends or family. Most people are embarrassed or ashamed of being in debt and won’t go this route.

The second way is to take out a personal loan for the amount that you owe. You may not think that this is an option for you because your credit score took a nosedive recently.

There are personal loans that don’t require credit checks or are designed for people with poor credit. You may be able to consolidate your debt into one loan. This will satisfy the debt collectors and give you a fresh start.

3. Settle Your Debts

When you’re looking at ways to deal with debt collectors, you may come across information to settle your debts for less than what you owe.

Here’s the thing that people don’t tell you when you settle your debts. Anything settled for more than $600 counts as income on your taxes. That can come back to haunt you come tax time.

Here’s an example of how it works. Let’s say that you have $15,000 in debt with one creditor.

You contact that creditor and they already closed that account and it’s in collections. The collections agency wants the debt to be resolved, so they give you an incentive to pay it sooner.

They may say, pay us $7000 and we will consider the debt paid in full. So, you agree and make a payment plan that works for you.

When you complete the payments, you paid the debt in full. You’ll get a notice from the creditor saying that they settled the debt for $8000 less than what was owed. That $8000 gets reported to the IRS as settled debt.

You’ll get a Form 1099-C, which reports your debt settlement and must be reported on your taxes. You are likely to be taxed on that $8000. There are a few exemptions to this rule, so it’s best to consult with an accountant before accepting any debt settlement agreement.

To make matters worse, a debt settlement will appear on your credit report as settled, which can drag down your credit score.

Deal with Your Debt

There’s nothing worse than being in debt and not being able to pay your obligations. It causes stress, depression, and it makes you want to hide and hope it all goes away.

The thing is, it won’t go away. You have to know how to deal with debt collectors when you can’t pay. That’s the only way to take control of the situation. It may seem scary, but when you do work with your creditors, you’ll find that they’re more willing to work with you.

You’ll be able to come up with a clear-headed plan to resolve your debt, whether that’s to take out a loan to pay the debt or settle it with the creditor. There are pros and cons to every situation. You need to know what they are before you make a decision.

Do you want more financial tips? Be sure to head over to our Resources section of this site to learn about everything from credit cards to raising your credit score.