When you’re trying to put a collection account behind you, the biggest hurdles are coming up with the money to pay the debt and negotiating a payment plan or settlement that you can afford. Once you’ve accomplished that, however, the next question is, “How do you pay the debt collector?”
It may be trickier than you think. Some payment methods are riskier than others. The debt collector is likely to try to get you to pay using a method that’s best for him, but not for you.
“When dealing with the subject of paying debt collectors, many experts will always look to the Fair Debt Collection Practices Act (FDCPA),” warns financial consultant Damon Day. “While I agree it is important to know what collectors can and can’t do, I rely more on Murphy’s Law when advising clients about the best options for paying debt collectors. For those unfamiliar with Murphy’s Law, it is typically stated as: ‘Anything that can go wrong will go wrong’.”
With that in mind, here are the pros and cons of various methods for paying debt collectors.
Bank Account Draft/ACH
Most debt collectors ask you to provide information about your checking account so the payment can be taken right out of your account. It’s convenient, and often costs you nothing. But is it safe? That depends on how well you trust the debt collector.
“Never [pay this way],” says Mike Arman, a retired mortgage broker. “Autodebit is permission to access your account whenever they feel like it and then say ‘Oh, we made a mistake’—and do you think you’re getting any money back? They can also come back later for more, whether by ‘accident’ or design.”
Even if the debt collector does what he says he will, there’s another potential problem with this method. If you agree to pay off your debt in installments and your financial situation changes, or if there’s not enough money in your account to cover the payment when it’s due, you may find yourself on the hook for both the debt to the collector, as well as a new debt to your financial institution for overdraft fees.
In addition, this method “may be difficult to stop at the last minute because of processing cycles,” warns Bill Bartmann, President and CEO of CFS II and a veteran of the collection industry.
An alternative? Open a second checking account just to pay the collector. “Setting up a new checking account will allow a consumer to set up an auto draft or write a personal check to a debt collector without putting the rest of their finances at risk,” says Day. Of course, if you only have a single debt to resolve, that approach may prove to be an expensive hassle. If so, you may want to consider another method.
The general consensus? Avoid giving your bank account information to a debt collector unless you’ve set up a separate account for this purpose.
Mailing a personal check is fairly cheap: it only costs you the price of postage, plus certified mail fees if you want confirmation that your check was received. (That’s recommended, of course). You’ll also have your canceled check as proof of payment. It’s not terribly fast, though, and for that reason it may not be at the top of the debt collector’s list of preferred payment methods. Plus, you’re providing the collector with information about your checking account.
A safer alternative is to use your financial institution’s online bill pay service. Gregory B. Meyer Community Relations Manager at Meriwest Credit Union explains, “Your online banking will send them a check that is basically guaranteed funds like a cashier’s check, but your personal info, like your account number, does not show on it.” Ask your credit union or bank for details.
Tip: If you haven’t already set up online bill pay through your financial institution, it can take a few days to get started. So don’t wait until you’ve struck a deal to sign up.
What about postdated checks? Under the Fair Debt Collection Practices Act, debt collectors are not supposed to deposit postdated checks before the date on the check (or even threaten to do so). And if the collection agency accepts a postdated check that’s dated for more than five days in the future, it is supposed to notify the consumer in writing 3-10 business days before depositing it. However, not all debt collectors play by these rules.
“Collectors will say that (sending postdated checks) is part of the terms. It is not true and you can negotiate that,” says Leslie Tayne, a New York attorney who specializes in consumer debt resolution.
The general consensus? Avoid postdated checks. Use a personal check only if it comes from a separate account you’ve set up to pay the collector, or use your financial institution’s online bill pay service.
Debit cards access funds in the checking account to which they are tied. So the same warnings that apply to bank account drafts/ACH apply here. If the amount charged to your debit card is wrong, or if there are multiple withdrawals when you only agreed upon one, you’ll be fighting the collector to get that money back in your account. While consumers generally are protected against unauthorized withdrawals under the Electronic Funds Transfer Act, it may be difficult to prove the amount wasn’t approved since you gave the debt collector your debit card information.
The general consensus? Avoid giving a debt collector your debit card number.
[Editor's Note: If you're working on getting your debt in line, you my also want to track your credit scores as you rebuild. They can help show you how to pay off debt the right way to improve your credit scores faster. The Credit Report Card is a free tool that updates two of your credit scores every month and explains the biggest factors affecting your credit. You may also want to look at your credit reports, which you can get free copies of from each of the major credit reporting agencies once a year.]
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