Should You Ever Ignore Collection Debt?

If you're behind on one or more debts, you're not alone. According to the Consumer Financial Protection Bureau (CFPB), over 12% of consumers have at least one credit card account that's more than 30 days past due, and about 11% have at least one account that's 90 days past due.

The CFPB also notes that approximately 175 million accounts were in collections in 2022, according to credit reporting data. So falling behind on your credit card payments is common. And having your accounts charged off and sold to a debt collection agency is also extremely common.

So the question becomes: what should you do about it? Usually, accounts fall behind because, for one reason or another, we can't afford to make the payments. Once an account heads to collections, we probably still can't pay. But if we can pay, should we? What are the incentives for paying off a debt that's in collections? And what are the potential ramifications for attempting to ignore a collection debt?

Arguments for ignoring a collection debt

You can't make a payment even if you want to

Third party debt collection typically works like this:

• Once a credit card account reaches 181 days past due, the creditor may choose to charge it off and claim the lost profit in order to lower their tax liability.
• The original creditor can then sell the account to a third party collection agency for less than total balance.
• Although the collection agency purchased the debt for less than what you owed, they can still attempt to collect the full amount.
• Most collection agencies are happy to settle the debt. Any settlement or debt resolution plan will likely be much cheaper than other debt repayment options because you're only paying off a portion of the original debt. 

Of course, if you can't afford to make any sort of payment, than settling or agreeing to a repayment plan are both off the table. 

The statute of limitations will eventually expire

All states have statutes of limitations on all the different types of debts you can incur. These limitations can vary from 3 years to 15 years, depending on where you live and the type of debt.

These statutes protect you from being sued by a creditor after a certain amount of time has passed. It doesn't mean that creditors won't continue to collect the debt, however. It just means that if they try to sue you after the statute of limitations has expired, you'll be able to use that as your defense.

You may be judgment proof

Regulations are in place to protect seniors and financially-vulnerable consumers from collections efforts that may jeopardize their ability to manage their basic needs. If you qualify as "judgment proof" certain income sources (including Social Security, VA benefits, SSI, and retirement funds) may be protected against potential garnishment to repay debts.

Arguments against ignoring a collection debt

Interest and fees don't stop accruing

You may think that once a debt hits the collection department it becomes frozen in amber, unchanged by time. But unfortunately that's not the case.

In fact, debt collectors are able to charge interest and fees. If you ignore a debt in collections, over time it may balloon to something many times bigger than the original debt.

You may be sued by your creditors

Creditors and collection agencies are more willing than ever to use the court system to recover their money. According to research from The Pew Charitable Trust, debt collection cases take up an increasingly large percentage of civil court cases. Where 1 in 9 civil cases were debt claims in 1993, that figure is now over 40%. Additionally, Pew estimates that approximately 1 in every 20 adults with collection debt were sued in 2021.

The most common outcome of being sued by a creditor is that your wages will be garnished until the debt is repaid. A wage garnishment can make an already tight budget completely unmanageable. 

Your credit will be severely damaged

In all likelihood, once you've reached this point, your credit may already be toast. That said, clearing a debt in collection, even with a settlement, can do a lot to accelerate your credit recovery.

Many of the newer credit scoring models will ignore collection accounts once they're reported as paid in full or paid less than full balance (settlement). Simply not having those account included in your score calculations can make a significant difference.

What should you do about your collection debt?

It's up to you to decide what's the best way to deal with any of your debts, including debts that have gone to collections. Weigh the pros and cons of each action, consider your finances and what you can afford, and factor in your goals and how your choice will impact those goals.

Ultimately, if you're able to (and you're not judgment proof), there's usually no downside to repaying or settling on a debt in collections. Simply stopping the collection activity and removing any potential for legal action can do wonders for your stress levels.

If you're financially strained and unsure what's the right answer for you, MMI offers free financial counseling, 24/7, online and over the phone. Our experts can review your debts and income and help you decide the best way to improve your financial situation.