The 5 Stages of Debt Collections

People usually refer to an account being x number of months past due when really, what we should be clarifying is how many DAYS past due an account is. There is a big difference between 89 days past due, and 90 days past due. Usually, that difference is never being able to use that account again.

This is why it is important to know what phase of delinquency your accounts are in, as your options and consequences vary at each stage.

Stage 1 - CURRENT:
Monthly payments are made by the due date.

WHAT THIS MEANS: Your monthly payment is made on time.

GOAL: Pay off the balance in full every month. But at a minimum, continue making the minimum payment by your due date to avoid late fees, or being charged a higher default interest rate.

CONSEQUENCES OF NON-PAYMENT: The account becomes Past Due when you haven't made payment 30 days after the first missed payment. EX: Due date: 12/25/22, and you still don't pay by 1/25/23, your account is now 30 days past due (1 month past due), and is usually reported to the credit bureaus.

TIP: If you are on a special low introductory interest rate, *some creditors will take away that nice intro rate even if you are ONE day past due. So if you are going to be late call before you miss that first payment.

Stage 2 - PAST DUE:
Usually* 30-89 Days Past Due

WHAT THIS MEANS: You haven't paid the minimum payment in 1-3 months/billing cycles. Each month you don't pay there are additional delinquency fees and interest. This increases the minimum amount due to bring the account current.

GOAL: Reduce the minimum amount needed to bring the account current. You can do this by talking to your creditors, briefly explain why you are having a financial hardship, and ask if they can help you out by. . .

1. Remove/waive any fees
2. Temporarily reduce/eliminate interest rate
3. Offer a payment plan if unable to pay the minimum due by the due date

CONSEQUENCES OF NON-PAYMENT: After 3 months of non-payment the account will Close, meaning it's no longer an account you will be able to use for purchases. You are still responsible for paying off your remaining balance plus interest.

Stage 3 - CLOSED: 
Usually* 90-179 Days Past Due

WHAT THIS MEANS: You haven't paid the minimum payment in 3-6 months. Each month you don't pay there are additional delinquency fees and interest, and usually the balance becomes due in full immediately.*

GOAL: Reduce the minimum amount needed to bring the account current. You can do this by talking to your creditors, briefly explain why you are having a financial hardship, and ask if they can help you out by. . .

1. Remove/waive any fees
2. Temporarily reduce/eliminate interest rate
3. Offer a payment plan if unable to pay the minimum due by the due date

TIP: If you are working with a creditor who is unable or unwilling to reduce fees or interest rate, then you may want to consider letting the account default. I'll explain why in the next phase.

TIP: Once an account is closed, often the original creditor will be willing to negotiate a settlement on the account to avoid sending the account out to a collection agency.*

CONSEQUENCES OF NON-PAYMENT: After 6 months of non-payment the account will Charge-Off or go into Default.

Stage 4  - CHARGED OFF: 
Usually* 180+ Days Past Due

WHAT THIS MEANS: You haven't paid the minimum payment in more than 6 months. The account is reported to the credit bureaus as a default account. The balance becomes due in full immediately.

The original creditor usually places the debt with a 3rd party collection agency to collect on behalf of the original creditors. NOT many debts are sold right after charge-off "for pennies on the dollar." I'll discuss that in more detail in a future blog post.

GOAL: Instead of making small monthly payments on several debts, save those payments plus all additional cash you can pull together to eventually settle these debts for less than the full balance. 

1. Only agree to set up a payment plan if it will avoid Legal Action
2. Typically the older the debt the better the settlement offer
3. Avoid Legal Action long enough to settle every Charged-Off debt

TIP: When you have larger lump sums to negotiate with, call every creditor to get their best settlement offer if paid in full by the end of the month. Try to settle as many accounts as possible with the immediately available funds.

Don't be afraid to make counter offers back to the creditors before accepting and paying their first offer. Can't hurt to try and get an additional 10-20% percent off!!

TIP: You can ask the agency to remove the debt from your credit report with a settlement payment in full, but not many creditors agree to do this anymore. (But it's worth a try)

TIP: ALWAYS make sure that you get any settlement agreement in writing before making payment. Email or fax is fine so long as it states the account will be considered 'Settled in Full' with the agreed-to amount. (Save this paper in your records FOR-EV-ER so they can't ever come after you for the unpaid portion of the settlement.)

CONSEQUENCES OF NON-PAYMENT: A creditor or collection agency could take 'Legal Action' to force payment of debts.

Stage 5 - LEGAL ACTION:
Creditor takes something from you in lieu of payment

WHAT THIS MEANS: Your paycheck could be garnished, your bank account garnished, or a court judgment to place a lien on any property. Owe the Government? They can seize your tax return. SO...

GOAL: Avoid at all costs!!

CONSEQUENCES OF NON-PAYMENT: Here is what you could expect by debt type:

1. Mortgage: Foreclose on your home, and sell it at auction. If the sale price doesn't cover your balance owed you're on the hook for the difference.
   
   
2. Secured Debt (all motor vehicles): They will re-possess the asset and sell it at auction. If the sale price doesn't cover your balance owed you're on the hook for the difference.
   
   
3. Unsecured Debt: The most common action is to garnish paychecks. But if the balance is high enough and you own property, some creditors will seek a court judgment. Bank garnishments are the rarest, and vary widely based on state/local laws.*
   
   
4. Student Loans: The most common action is to garnish paychecks. Remember these are Federal loans and are not included if you file bankruptcy. And when taxes roll around don't be surprised if they seize a portion or all of your Federal tax refund.
   
   *TIP: if you have federal loans in default, most accounts will qualify for the Federal Loan Rehabilitation Program. Make 9 months of on-time payments, often as low as $5/mo, and the account will come out of 'default' and back to the loan servicer.
   
   Make sure you begin paying the original loan servicer immediately, as the Fed/Rehab Program is a ONE-time offer. If you fail to make 9 consecutive payments or let your account go into default at any time again in the future, you won't be eligible for the program again.
   
   
5. Medical Debt: Defaulted/Charged-Off medical debt can be reported to the credit bureaus, and can affect your credit score. The only other consequence of non-payment is having a Medical Provider (often a specialist) that you owe a balance to, possibly refuse further treatment until the debt is paid.*

TIP: If you don't own any property, and don't work a 'W2' job, there isn't much a court-ordered judgment can do while you are alive. However, any judgments would be paid out (in full) from your estate upon your death.*


Click below for a couple FREE downloads to help you inventory your debt and keep track of which creditors are offering what. 

Get your FREE Creditor Conversation Log and Debt Inventory Form

*Situations vary from creditor to creditor or from state to state.
​
Disclaimer: This content is for informational purposes only. All materials and information do not constitute financial advice. Always consult a financial professional before making financial decisions.

Author: Kyra Jones

Debt collector turned financial coach