The Collections Process in Debt Settlement Explained

You stop paying, the account slips behind, and at some point a collector starts calling. People hear this is part of debt settlement and assume the worst. But there's a plain reason creditors behave this way. There are also limits on what a collector can do.

Do you have to be in collections to settle a debt?

You don't set out to land your account in collections, but you should expect it to happen, because settlement runs on falling behind.

What changes a creditor's willingness to deal is whether your account is current. Creditors generally won't negotiate while an account is current, and often won't until it's significantly past due. So people in a settlement program have usually stopped paying.

Put another way: it would be great if creditors settled before your accounts entered collections. But many won’t.

It’s normal—most settled accounts have been charged off first. In fact, one CFBP survey found that more than 70% of settled accounts were charged off before they settled. A creditor typically charges off an account after about 180 days of non-payment. 

Learn more: Charge Off vs. Collection

Why creditors start negotiating once you fall behind

A creditor looking at a current account expects to be paid in full, so there's nothing to discuss. Once payments stop, that changes. The creditor faces the prospect of collecting nothing, so a reduced lump sum can start to look reasonable. Especially compared to the cost of taking legal action against you for the debt (with no guarantee that they’ll win the amount they want). 

This is the leverage a settlement is built on. While you're not paying creditors, you set aside money in a separate account instead. Reputable debt settlement programs use a separate, FDIC-insured account that you own and control, to build funds toward a possible settlement. The money stays yours. You can close the account or withdraw at any time, without penalty. When a creditor agrees to a settlement, you approve it, and a payment goes toward the agreed amount.

Programs commonly run 2 to 4 years, though timelines vary. For the full walk-through of how a program works, see our guide to how debt settlement works.

What collections looks like during a settlement program

Enrolling in a program doesn't stop collection contact. It continues during the process, and it can be persistent.

Bankruptcy triggers an automatic stay, a court order that freezes collection. Debt settlement has no equivalent. Calls, letters, and even lawsuits can continue throughout the program. As your accounts age, a creditor may hand the debt to its own collections department, or sell it to a third-party collector. The contact then comes from whoever holds the debt now.

The law sets limits on that contact. Under the Fair Debt Collection Practices Act, a debt collector is presumed to be breaking the law in two cases. The first is calling you about one debt more than seven times in seven days. The second is calling within seven days of talking with you by phone about that debt. Those call limits cover phone calls only. 

Collectors also can't contact you before 8 a.m. or after 9 p.m., or at a time or place they know is inconvenient for you (for example, after you’ve told them you can’t take personal calls at work). In general, they can’t harass or threaten you.

You can ask a collector in writing to stop contacting you, and you have the right to sue a collector who breaks the rules. For a collection lawsuit or a serious violation, talk with an attorney about your situation.

Bills Action Plan

Step 1: List each unsecured debt, what you owe, and how far past due it is.

Step 2: If collectors are contacting you, save the record. Note the dates and times of calls, and tell any collector in writing about times or places that are off-limits.

Step 3: Ask a debt settlement company how your specific creditors tend to respond, and what a program would and wouldn't change about the calls.

Key Terms

Charge-off: When a creditor decides a debt probably won't be repaid and moves it off its active books, usually after about 180 days of missed payments. The debt doesn't disappear. It's still owed, and it's often handed to a collections department or sold to a collector.

Automatic stay: A court order that stops collection activity the moment someone files for bankruptcy. Debt settlement doesn't come with one, which is why collectors can keep contacting you during a program.

Dedicated account: A separate, FDIC-insured account you open and control during a settlement program. You build up funds in it toward future settlements. The money stays yours, and you can close the account or withdraw at any time.

This article is for general education, not legal or tax advice. For help with your specific situation, including any collection lawsuit, consult a licensed attorney.