The Truth: Should You Never Pay a Debt Collection Agency?

George Simons | July 21, 2022

Don't pay that debt collector just yet.

Summary: When a collector contacts you, respond with a debt validation letter. You may not want to pay a collector if you will never have any income or assets, if you don't owe the debt, if you want to settle for less, if the statute of limitations has expired, or if the collector doesn't own the debt.

You've heard that you should never pay a debt collection agency, and now you want the truth. What happens if you never pay collections? Should you pay the debt collector or the original creditor?

Debt collection agencies can employ a variety of shifty tactics. They may start with harassing phone calls and escalate from there. But depending on your situation, you may never need to pay a debt collector. Not sure where to begin? SoloSuit can help.

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Debt Collection Agencies Buy Your Debt From Lenders

Debt seems like a fact of life for many Americans. Four out of five Americans (80 percent) owe some debt. Collectively, Americans owe $1.4 trillion to banks, credit card companies, and other lenders.

There are usually two parties in debt collection cases. First, there's the party who allegedly owes money, called the “debtor.” Then, there's the party to whom the money is allegedly owed. This party is known as the “creditor.”

Often, a lender finds they can't collect a debt from a borrower. Interest keeps piling up on the borrower's loan, and there's no money coming in to pay it. A lender now has two options:

Collect the debt themselves. However, tracking down an alleged debtor can become more of a hassle for the lender than it's worth.
Sell it to a debt collection agency. Lenders give up their right to collect the debt but still receive some money. This helps lenders to recoup some of their losses.

A debt collection agency is a company that buys unpaid debt from a creditor. Debt collection agencies usually buy these debts for pennies on the dollar. Then, they attempt to track down a debtor and force them to pay.

Because these companies specialize in tracking down alleged debtors, they're better suited to collecting unpaid debt than lenders themselves. They employ a small army of sleuths equipped with the world's best search tool: the internet. Against these odds, an alleged debtor is hopeless. Debt collection agents can track their prey using anything from bank records to voting data - even internet providers!

Don't hide from debt collectors. Respond in 15 minutes with SoloSuit.

Old Debts Can Cause Problems Whether You Pay or Not

At first glance, it might make sense to just pay off a debt collection agency. After all, that's the easiest way to make them leave you alone, right?

Not exactly. Sure, paying a debt collection agency may get them off your back. But that's all it'll do. Evidence of the unpaid debt will remain on your credit report for another seven years. The actual amount of the debt doesn't matter. Collections raise the same red flag on your credit report, regardless of whether the debt is for $100 or $100,000. This can affect your ability to secure loans in the future.

What's worse, intent doesn't matter in debt collection cases. Many debtors aren't trying to dodge their creditors. They just don't know they owe money. This happens all the time. A creditor may send an unpaid debt notice to a borrower's old address. The borrower never receives it and goes on with their lives, unaware of the debt following them.

This lingering debt can have some surprising effects. It'll make getting new loans more difficult. Securing financing for a car, mortgage, student loans, or home improvement is significantly more difficult with bad credit. But that's not all. Bad credit can also make it difficult to rent a home or even open an online streaming account.

On the other hand, paying an outstanding loan to a debt collection agency can hurt your credit score. Yup, you heard that right. Any action on your credit report can negatively impact your credit score - even paying back loans. If you have an outstanding loan that's a year or two old, it's better for your credit report to avoid paying it.

Protect your credit score by filing a response with SoloSuit.

How to Decide If You Should Pay a Debt Collection Agency

There's no “silver bullet” in a debt collection case. While ignoring a debt collector may be an option in some cases, it's not available to some debtors.

Here are some general considerations.

If you refuse to pay a debt collection agency, they may file a lawsuit against you. Debt collection lawsuits are no joke. You can't just ignore them in the hopes that they'll go away. If you receive a Complaint from a debt collector, you must respond within a time frame determined by your jurisdiction. For most areas in the US, that time frame is 14-30 days.

If a debt collection agency wins their lawsuit, they have several options available. For example, debt collectors may garnish earnings to collect a debt. A garnishment is a court order that takes money directly from a debtor's earnings. This money goes towards repaying the debt they owe. Consider this possible outcome before ignoring a debt collector's payment demands.

Here's one more thing to keep in mind. Interest on your unpaid debt will continue to pile up as time passes. If you don't pay a debt collection company, the amount of money you allegedly owe will keep increasing.

Sometimes, paying a debt collection agency makes sense. Remember, these agencies buy debt for pennies on the dollar. As a result, you may be able to negotiate paying off your debt for a much lower amount than you owe. Debt collectors may also send you a letter stating that your debt is paid. You can use this letter to remove evidence of the debt collection from your credit report.

A piece of advice: pay the right person. If you receive a letter from a debt collector demanding money, do your research. Often, debt collection agencies sell debt to one another. Don't just assume you're paying the right debt collector. Make sure your debt hasn't changed hands.

Consider these factors and situations

Here are some more specific factors to consider

It may be a good idea to not pay a collection agency

If you have no income or property and plan to never have income or property at any point in the future. In this case, you may be “judgment proof.” If you plan to ever own anything or have income again in the future, you are not judgment proof.
If you don’t owe the debt. Rule #1 of life: don’t pay people money you don’t owe them. If an agency is hounding you for a debt you don’t owe, send them a Debt Validation letter to get them off your tail.
If it is part of your strategy to settle the debt for less. A proven strategy for paying less on a debt is to send the collector a Debt Validation Letter. This may force the collector to sue you for the debt or to give up. When they sue you for the debt, respond with an Answer to a Summons and Complaint. This may force them to give up or to settle the debt for less.
If the statute of limitations has expired. If the statute of limitations has expired then the collector can no longer legally sue you for the debt. Making a payment on the debt will likely reset the statute of limitations — which is disastrous.
If the collection agency can’t show ownership of the debt. Frequently, the sale of a debt from a creditor to a collector is sloppy. A collection agency hounding you may not be able to show they actually own your debt. If they can’t, then you aren’t obligated to pay them.
If you are morally opposed to paying someone other than the original creditor. As explained earlier, if a collection agency is coming after you, the original creditor may have sold your debt. Many people think it is unethical for creditors to sell debts. Also, some people argue, you don’t have an ethical obligation to pay someone other than the original creditor.

The argument goes like this. You owed $1000 to the original creditor. The creditor sold your debt for $100 to a debt collector. If you pay $1000 to the debt collector, that doesn’t restore the creditor. Besides, the creditor already got their remedy for the debt in the $100 from the collector. Also, you don’t owe the collector $1000, because they only paid $100 for your debt. That said and the ethical argument aside, if a collector legitimately bought the debt from your creditor, you do have a legal obligation to pay, if the debt was legally assigned to the collector.

You may want to pay a collection agency

If you owe the full amount of the debt and the agency owns the debt.
If you want to resolve the matter as quickly as possible and have the money to do so.
If you believe you have a moral responsibility to pay off debts regardless of whether they are actually owed.

For most people, it makes sense to angle for a settlement. If a collector is hounding you for a debt they are probably adding on hundreds or thousands of dollars in fees to the debt. They also probably bought the debt for only around 10 percent of the face-value of the debt. These factors suggest that if you paid the full amount they are asking for, you would be overpaying.

On the other hand, if you don’t pay off the debt at some point, they may keep hounding you forever. Even if the statute of limitations has expired and they don’t get a judgment against you, they can still keep asking you for payment or selling your debt to the next guy till the end of time — or it ends up on the spreadsheet of some street-thug collector who threatens your life.

Using the Debt Validation Letter and Answer defense is the best way to angle for a low settlement. Once you pay the settlement, you’ll have documents showing the case is dismissed with prejudice and there was a full and final settlement. At that point, the debt is resolved.

Use SoloSuit to make your Debt Validation Letter

SoloSuit can take care of all of this for you. Our Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it. Just answer a few questions online, and we’ll create your letter for you.

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"You'd be silly not to drop a few bucks and possibly save yourself thousands in the process. I can't thank you all enough for making an overwhelming situation something handleable." – Daniel

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Or try our free template here.

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit: A Student Solution To Give Utah Debtors A Fighting Chance

What If the Collection Agency Sues Me?

If the collection agency sues you, stick to your guns: you can win. This flowchart shows you the path to victory in a debt collection lawsuit. Pre-lawsuit, make sure to send the collector a Debt Validation Letter telling them you dispute the debt and requesting validation of the debt.

If they sue you, be sure to file an Answer in court. This will make it more likely they give up and the case gets dismissed. If not, you can angle for a settlement with a Debt Lawsuit Settlement Offer Letter.

How to win a debt collection lawsuit flowchart. Litigation Flowchart.

How Does Collections Affect My Credit Score?

Having debt in collections definitely negatively impacts your credit score. Paying off the debt will likely improve your score with credit bureaus that use FICO 9 or Vantage Score 3.0 or 4.0 — the newest versions of credit scoring.

Debt in collections is considered under payment history — the biggest factor in the most common credit score, FICO. Payment history drives 35 percent of your score.

Some lenders have special policies that prohibit them from lending to people with unpaid debts in collection.

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