3 steps to take when your debt goes into collections

The Urban Institute recently released a report that found 35 percent of Americans have non-mortgage consumer debt in collections. Collections. As in when opportunistic collection agencies, who’ve bought the debt for pennies on the dollar, make less than pleasant phone calls during dinner, imploring you to pay up.

The large number of people in the U.S. with debt in collections certainly does represent a problem, but not the one you may initially assume. Because the average amount of debt is relatively small at $5,200, it likely doesn’t represent a systemic crisis with imminent ramifications for our economy. But that amount is still far from meaningless, and a few of the study’s deeper implications are concerning:

1)     Most people don’t pay much attention to their credit until they need it or something goes wrong. It’s entirely possible that many of the accounts in collections have gone entirely unnoticed by the debtors, and this is especially likely in the case of medical bills. The information on our credit reports and contained in our credit scores is worthy of our attention, and in some cases it’s vital to our financial health.

2)     In the space of a generation, consumer debt, whether in collections or not, has gone from something to avoid at all costs to the norm in most of our lives. Most of the expenses for which consumer debt is accrued should be handled by our emergency savings or monthly cash flow.

3)     All debt, but especially consumer debt, weighs on individuals and households intangibly, beyond the dollars and cents. Debt takes an emotional toll on us even beyond the economics.

So, what to do?

First, check your credit report at least annually. AnnualCreditReport.com will allow you to inspect reports from each of the three major credit bureaus once per year, at no cost. CreditKarma.com and CreditSesame.com require signing up, and link to only one report, but they’ll approximate your credit score as well, also for free.

Second, if you have consumer debt — especially debt in collections — consider it your financial enemy number one and pay it off! You’ll have already suffered a hit on your credit report for having had a debt go to collections, but the impact will soften as you repay it and time passes.

Third, do not go into denial as a means for dealing with debt that you’d rather forget. Recognize the powerful emotions that often come with consumer debt and overrule them with reason, which opens the door to careful and considered action.

And finally, always read the fine print. Whether you’re opening up a credit card account with a department store or joining a new gym, your credit is likely playing a role. Don’t just skip to the bottom and “Sign Here.” Know what you’re getting into.

Tim Maurer, CFP® is a wealth advisor for Buckingham Asset Management and the director of personal finance for the BAM ALLIANCE.  You can follow him on Twitter at @TimMaurer.

This entry was posted in Advisor Insight, Debt, Personal Finance. Bookmark the permalink.

Leave a Reply