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Collection Agency Payment Plans: Everything You Need to Know

When you're dealing with debt collectors, setting up a collection agency payment plan can be the first step to becoming free of your financial burden.

Christy Rakoczy
Ashley Eneriz
By Christy Rakoczy
and Ashley Eneriz
Jess Ullrich
Edited by Jess Ullrich
Updated Dec. 17, 2024
Fact checked

If you have debt in collections, you're not alone. In fact, according to 2024 data from the Urban Institute, an estimated 22% of Americans have debt in collections. But while it's very common to owe money to debt collectors, that doesn't make coping with collection efforts any less stressful.

The best way to manage a large debt in collections is to have a payment plan and know your rights as the debtor. Here’s what you need to know to set up a collection agency plan, no matter how much debt you work with.

What is a collections payment plan?

A collections payment plan is a plan you, as a debtor, might set up with a collection agency after your original creditor sells or transfers your debt. Your debt might go to collections if it’s more than 90 or 120 days late, at which point your creditor might decide to sell your debt to a third-party collection agency or transfer it to its own collections department to be dealt with.

Setting up a collections payment plan can help you organize your debt repayment into a monthly amount that feels doable. But a debt collector doesn’t have to agree to a payment plan — it can demand the full lump sum (or a slightly reduced total) due. You’ll have to negotiate a payment plan and justify your request with reasons you feel your situation justifies one.

A collection payment plan is more likely to be approved if your debt is sizable. For example, if you owe $20,000, collectors might agree to a payment plan to try to recover that money. But they might be more inclined to ask for the money now if you only owe a couple thousand. A collection agency might also refuse a payment plan if you have a history of defaulting.

Pro tip
Sometimes, collection agencies offer payment plans upfront. Otherwise, you may have to request one.

When a collections plan makes the most sense

While you don’t have control over your debt being sold or transferred to a collection agency, you have some say in tackling the debt from there. Before you set up a collection agency payment plan, pause and evaluate your financial situation. Ask yourself:

  • Can I pay this debt in full? If the answer is no, determine how much you can afford to spend per month on this debt. You might need to make budget cuts to pay off your debt quickly and avoid excess interest and fees. Knowing how much you can afford will help you establish a monthly collections payment that doesn’t put you in a worse position.
  • Do I want to preserve my credit? If your credit is in good shape and you’ll rely on it in the next few years for a big purchase, like a home, setting up a payment plan with the collection agency may help you reduce damage (though it’s important to note that some credit scoring models — including FICO 8 — will continue to count paid collections accounts against you).

A collection plan makes the most sense when juggling multiple debts — such as medical bills — or one larger debt, and you need a concrete plan to get debt-free.

How to set up a payment plan with a collection agency

In most cases, the only way to get out of debt is to make at least some payments to a collection agency. But you don't just want to start sending money to debt collectors. There are some steps you should take first.

Step 1: Understand your rights

Far too many people are bullied into spending money they can't afford on past-due debts because of threats or abusive behavior from debt collectors. To ensure this doesn't happen to you, be aware of protections put in place by the Fair Debt Collection Practices Act (FDCPA).

The FDCPA imposes many limits on what debt collectors can do. For example, collectors can't harass you, use obscene language, or threaten legal action against you unless a lawsuit is filed. Collectors can't pretend you've committed a crime or make false statements. And, upon your request, collectors must provide proof of what you owe.

Tip
If you request collectors stop contacting you, they have to — although they can continue to report delinquent debt to credit reporting agencies and take other steps to collect, such as pursuing a court case against you.

Step 2: Know what you owe

Collectors are required to provide proof of your debt obligations and to show you what you owe. You simply need to request details on your outstanding debt and collectors can't continue to try to recover the unpaid balance from you until they provide this information.

You should also check your own records to make sure collectors aren't trying to collect debt that you've already paid off or debt that has been discharged in bankruptcy. If collectors are claiming you owe more than you think you should, be sure to send them a letter disputing the debt and asking for proof of the outstanding balance.

Tip
The statute of limitations for debt collection varies by state but is generally between three and six years. If the statute of limitations has expired, you don’t owe, so don’t sign any paperwork or make an agreement to pay.

Step 3: Draft your own repayment plan

Once you have an idea of how much you owe, figure out what you can afford to pay and create your own proposal for a repayment plan before you call the collection agency. That way, you can open the negotiations about how to pay off debt on your terms.

Many collectors are more willing to settle debt if you can pay a lump sum amount. With this type of debt settlement agreement, you agree to pay less than the total you owe in one lump sum and the remaining balance is forgiven. A debt settlement can affect your credit, unlike debt consolidation, but you may be able to negotiate with the collector to report the debt as paid rather than as settled as part of your repayment agreement.

Note
Debt settlement can negatively impact your credit score, and you may have to file a tax form if the forgiven debt is more than $600.

Step 4: Call the agency

You should find out if the person who answers the phone has the authority to negotiate with you or if you need to talk with a manager. Once you're on the phone with the right person, present your proposed repayment plan.

Remember, the collector probably bought this debt for pennies on the dollar and might not expect to be paid back the full amount. This means you have leverage when negotiating a payment agreement. While the collector will likely try to convince you to up your offer and provide them with more money than you're proposing to pay, you don't have to agree.

The dos and don'ts of payment plans

While negotiating your payment plan is the hardest part of dealing with a debt collector, coming to an agreement is just the first step. You also need to actually make your payments — either over time or in a lump sum.

Before you pay, follow these tips to protect yourself.

Do:

  • Get your agreement in writing
  • Pay with a certified check or money order
  • Track your payments

Don’t:

  • Give the collector access to your bank account
  • Pay any debt that’s past the statute of limitations

Bottom line

Dealing with debt collectors is stressful. As difficult as it is to face the problem head-on, you'll be much better off if you're proactive in learning about your rights and proposing a repayment plan you can live with.

Your debt problem won’t just disappear, but in most cases, you can resolve it by creating an affordable payment plan and making sure you get the agreement in writing before you pay.

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