Do you still have to pay your debts if they’re sold to a collections agency?

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The number of Americans in debt, especially due to credit card use, continues to be dangerously high. A confluence of factors — including rising prices, stagnant wages, mounting medical bills and overspending — may all play a role in why so many people are in the red.

The good news is that untold numbers of consumers are being aggressive about their debt, educating themselves on financial literacy and implementing solid plans to climb out of the hole. But there are others who continue to be stuck in debt’s cobweb.

RELATED: Have you joined Clark’s ‘Debt Your Debt’ Facebook group?

The truth is that if you’re not careful with how you handle your debts, your credit can be ruined.

Some people believe that the debt will magically disappear after a while. One of the more persistent financial myths circulating on Facebook and other social media sites centers around how consumers can escape delinquent bills and what happens to your obligation to pay after your debt is sold to a collections agency.

Your debt was bought by a collections agency. Do you still owe?

Many people believe that you can get out of paying your bills if you go into arrears for an extended period of time and the company you owe sells the debt to a debt collector.

But before we delve into the hows and whys, we need to give an overview of the debt collections business. Collections agencies make money by being rewarded for getting you to pay your creditor. Some agencies are nothing more than middlemen who funnel what they collect back to the creditor and get a cut typically ranging anywhere from 15% to 40%.

In other cases, collections agencies actually buy the debt from the creditor and get their money back, typically plus interest or other fees, when they convince you to pay up. If they find that it is difficult for you to pay, they may work out an installment plan or end up taking a loss on your debt.

Clark: How to stop bill collectors from harassing you

But there is also a lot of corruption in the debt collections business. Money expert Clark Howard says consumers are routinely harassed — called on the job, at home or even threatened with jail — by bill collectors looking to get you to part with your money. The way they see it, they’re exercising their right to collect a debt.


“However, under the law, if you do have a debt, you also have the right to send what’s called a drop dead letter,” Clark writes.“This letter will prevent the collector from contacting you again about a debt. Collectors can’t call at work once you say they can’t. (Though you can still be sued against the debt you legitimately owe.)”

Here are 3 ways a debt can be forgiven

There are, however, three instances in which a debt may actually be forgiven, but all of them depend on specific and strict circumstances. Lets look at them:

  • Issuance of a 1099-C forgiven debt form: Usually, a lender will send you a Form 1099-C after you’ve worked out a debt cancellation with them. The thing is, the Internal Revenue Service requires that both the borrower and lender report the 1099-C. The bad news for you? The amount you negotiated off your bill may be considered taxable income. Common instances that may call for a 1099-C form are repossessions and foreclosures.
  • If the “statute of limitations” has passed: Some debts may be forgiven if they have exceeded the statute of limitations. That length of time is largely based on where you live, because it depends on the state. In most cases, statues of limitations run from between three to six years, although in some states, it is more. See the statute of limitations in your state here.
  • If your account is ‘resolved’: Debt forgiveness can also occur if you receive a letter from a creditor stating that your account has been resolved. On your credit report, you may see a “closed account,” meaning that the bill has been paid in full or resolved — that’s a good thing. But if it says “settled,” then it suggests that you worked out a deal and didn’t pay the full amount, which could ding your credit. “Anytime you do not repay an account in full or as agreed in the original contract it will have a negative effect on credit scores,” Experian says in a FAQ on its website.

You’ll notice that none of these instances involve a debt magically disappearing or becoming uncollectible just because the debt was sold to a collection agency, because that simply isn’t the case.

Finally, remember that it’s always better to negotiate with a creditor rather than a collector. And no matter who you deal with, make sure you get any agreement in writing. And if a debt collector says you owe them, as mandated by the Fair Debt Collection Practices Act, they are required to send you a written validation notice within five days of first contact.

RELATED: How a small unpaid bill can destroy your credit

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