8 tips for setting up a debt repayment plan
By Allie Johnson
October 1, 2015
You've got an old utility charge, a credit card balance or a hospital bill that's in collections, and there's no way you can pony up the entire amount. Don't worry, you might be able to set up a repayment plan.
In the wake of the recession, bill collectors have become much more open to offering repayment plans because that ups their chances of getting paid, says Michelle Dunn, a former debt collection agency owner and now a consultant and author of “The Guide to Getting Paid” and other books for debt collectors.
“It used to be you had to ask for a payment plan, and most of the time you'd be told no,” Dunn says. “But things have changed.”
That depends, though, on the debt collection agency, the amount owed, and the agreement with an agency's client, says Cindy Sebrell, vice president of public affairs for ACA International, a debt collection industry association.
While ACA doesn't collect data on how common it is for bill collectors to offer repayment plans, Sebrell says, “Debt collectors are trained to work with consumers to help resolve issues, and one primary way that is done is through a payment plan.”
Considering setting up a repayment plan with a debt collector? Here are eight steps to take:
- Make sure you really owe. If you're not sure whether you owe a debt, if the amount is correct or if the collection agency has the authority to collect, ask for validation of the debt, says Steve Rhode, a consumer debt expert who offers advice at GetOutofDebt.org. The Consumer Financial Protection Bureau offers a sample letter you can send to the debt collector to ask for written verification of the debt.
- Know the pros and cons of a payment plan. A payment plan can be a good way to tackle a debt without having to cough up a lump sum. However, there are some downsides, Rhode says. For example, each state has its own statute of limitations for how long a creditor can sue you over delinquent debt. In many states, that's four or five years, says Wayne Sanford, a Texas-based credit expert and owner of credit consulting company New Start Financial. If the statute of limitations is almost up and you make a payment, even a small one, that can restart the clock, Rhode says. Also, setting up a payment plan can extend the amount of time a delinquent account stays on your credit report, Sanford says.
- Ask about payment plans. A debt collector might initially demand payment in full, Dunn says. But that doesn't mean a payment plan isn't an option. Tell the collector you can only afford to pay your debt in smaller installments, she says. Remember, a payment plan benefits the collector, too, because they get some money and don't have to keep making phone calls and sending letters. “They don't have to baby-sit the account,” Dunn says. If the debt collector won't agree, ask for a supervisor who might have more leeway to make a deal, Dunn says.
- Don't overextend your budget. “The No. 1 mistake consumers make is to overpromise and under deliver,” Rhode says. Instead, crunch the numbers to figure out how much you can afford to pay, he says. At the same time, be realistic, Dunn says. If you owe, say, a $10,000 credit card balance, a payment of $25 a month isn't going to cut it, she says. But if you owe a small medical bill, that amount might be fine, she says. “Sometimes, if it's a medical debt, they'll be more lenient,” she says. Can't afford to pay much? Here's a little industry secret: A debt collector will be more likely to agree to accept a low amount from you if you offer to pay every two weeks instead of once a month, Dunn says. That's because debt collectors know that the more activity there is on an account, the more money they're likely to collect in total, she says.
- Be honest with the collector. If you want a collection agency to agree to accept a modest monthly payment because you're getting divorced, out of work or sick, tell the truth, Dunn says. Debt collectors do keep records of what you say in each phone call, and they'll even check up on you via social media, she says. So don't claim to be broke while bragging about your bonus on Twitter or posting pics of your island vacation on Instagram. “That raises red flags,” she says.
- Get specifics on how the plan works. Once you set up a payment plan, get as much information as possible about the details, Dunn says. Ask how you can make payments and what happens if you're late or miss a payment, she says. It's also best if you get the payment plan agreement in writing from the collector to prevent any future confusion or complications.
- Make payments by credit card. Generally, consumers can pay how they wish – either by sending in a check, paying online with a credit or debit card or setting up automatic debits from a bank account, Dunn says. The best way to pay is by credit card, Rhode says. That way, the debt collector doesn't get access to your bank account and you get all the consumer protections offered by credit cards, he says. If you're worried you'll slip into credit card debt, simply set up a recurring payment from your bank to the credit card company every month about five days after your payment to the debt collector, Rhode says.
- Don't miss payments. What if your payment plan is working out well, then your car breaks down and you can't afford to make your payment one month? Don't just skip the payment, which could cancel your repayment plan, Dunn says. And, just bailing on a repayment plan could make the collection agency more likely to sue you over the debt, she says. If you know you'll have to miss a payment, for whatever reason, call the bill collector and let them know ahead of time, she says. Then, follow up with an email or letter summarizing the conversation in writing, she recommends. “That way you have a paper trail,” she says.
It used to be you had to ask for a payment plan, and most of the time you'd be told no.”
— Michelle Dunn,
a former debt collection agency owner and now a consultant and author of “The Guide to Getting Paid”
At the end of the day, a debt collector really just wants to set up a payment plan you'll finish so they can move on to the next person.”
— Steve Rhode,
a consumer debt expert who offers advice at GetOutofDebt.org
And, speaking of getting it in writing, when you're done with the payment plan, make sure you get a letter stating that your debt is paid in full. “At the end of the day, a debt collector really just wants to set up a payment plan you'll finish so they can move on to the next person,” Rhode says.