Editor’s note: This story was updated February 28, 2014
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 cancelled 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.
Paying a debt collector with a credit card won’t make the debt go away. Instead, you will have new debt—and additional finance charges. “Paying one debt off while racking up new debt is an oxymoron in itself,” warns Howard Dvorkin, founder of Consolidated Credit Counseling Services. “If a person truly finds themselves in a financial situation where they are borrowing from Paul to pay Peter they need to reach out for help.” If you cannot pay a debt collector without taking on new debt, seek help from a credit counselor or bankruptcy attorney.
The general consensus? Don’t use a credit card to pay a debt collector.
Any collection agency that accepts debit or credit cards can accept a prepaid card. With a prepaid card, you simply load money onto the card and then give the collector your card number.
All prepaid card issuers charge fees. Some some have relatively few fees, others charge a lot of different fees. Give yourself time to shop for the right card if you choose this option.
On the plus side, with most prepaid cards you can only spend the money you’ve loaded onto the card, so if you get a card solely for this purpose you don’t have to worry about overdraft charges if the debt collector overbills you. And your personal financial information remains private.
However, your statement may be the only “proof” of payment you’ll get so make sure you keep a copy of that for your records.
Another trap: Debt collection scammers will instruct their targets to load money onto a prepaid card then mail the card to them. This allows them to be paid with virtually untraceable funds. Refunds are also impossible. Never send a debt collector a prepaid card as payment.
The general consensus? A prepaid card used solely to pay the debt collector can be a relatively safe payment method, but be sure to look for a low-fee card and keep a record of your payment.
Money transfers include services like Western Union or MoneyGram, as well as wire transfers directly from your bank or credit union account to the collector’s account. Debt collectors like this method because they can get paid quickly. Fees can be expensive, though.
On February 28, 2014, I researched fees for sending $750 to a debt collector in the U.S:
Western Union: I used the “pay bills” tab on their website to research how much it would cost to pay NCO Financial from Florida. Fees ranged from $24 to $49, depending on whether I planned to go in person to a Western Union office or pay by phone or online.
MoneyGram: The website “Pay Bills” page says “competitive pricing starting at only $1.49” however I could not find a detailed fee schedule. When I called customer service they stated the fee would be $10.99 to pay NCO. For a recipient not set up under their Pay Bills option, the website indicates a $62 fee for a transfer from a MoneyGram location, $75 for an instant transfer online using a debit or credit card, or $20 for an economy transfer from a bank account (requires 3 days).
Several sources raised concerns about the ability to confirm that a debt collector has received payment by one of these methods. Western Union says on its website that “guarantees to provide a transaction identification number that can be used for bill payment tracking purposes or your fee will be refunded.” Remember to ask about tracking information before paying this way, and and keep a copy for your records.
And watch out: money transfers are the preferred payment method for scammers, warns the Federal Trade Commission. In a consumer guide, it says:
Why do scammers insist that people use money transfers? Because it’s like sending cash: the scammers get the money quickly, and you can’t get it back. Typically, there’s no way to reverse a transfer or trace the money, and money wired to another country can be picked up at multiple locations, so it’s just about impossible to identify or track someone down.
The general consensus? Money transfers can be expensive, and potentially risky. Before paying a debt collector via money transfer, make sure you understand exactly what kind of proof of payment you will receive and make certain you the collection agency is legitimate.
Money orders are relatively inexpensive and can be purchased at a post office, bank or credit union and most convenience stores, grocery stores, etc.
Fees are usually quite low. At Wal-mart they are sixty cents. If you buy one at the Post Office, it will cost $1.10 to send up to $500, and $1.55 to send $501-$1000. You’ll have to mail the money order, so plan to add fees for postage and proof of delivery.
Cons? It’s “damnably frustrating in the event the money order is lost—replacement can take 90 days or longer,” warns Bartmann. Western Union, for example, charges a $15 fee to replace a money order if the customer has the receipt and $30 if the receipt has been lost.
It’s also difficult, if not impossible, to prove the collection agency cashed the money order you sent. You will generally have to rely on your money order receipt and proof of delivery if the collector says you didn’t pay. The U.S. Postal Service warns on its website that you can’t stop payment on postal money orders, and that you can’t “track or trace a money order in the mailstream.”
The general consensus? Money orders are cheap and help you maintain financial privacy, but it may be difficult to prove you paid the debt.
Most of the sources I spoke with had not heard of debt collectors using Paypal to collect. Bartmann observed, “Not many collection agencies can receive remittances by PayPal but I am hard put to think of a reason why a collection agency should not allow that payment method. Our agency has used PayPal for both payments to others and payments from others. We have been pretty happy with it.”
You can send money for free from your Paypal balance or your bank account. If you want to use a debit or credit card, the fee is 2.9% + $0.30. And “you just KNOW they are going to ask you to cover their fee to receive money in addition to what they claim you owe,” says Arman.
The amount you can transfer to the collector may be limited by a “sending limit”—check your account. Also keep in mind that it can take several days to get set up on Paypal to send money.
On the other hand, the debt collector won’t have information about your bank account, and if you set up a payment plan, Paypal states you can stop a recurring (“Preapproved”) payment anytime up to three business days before it is scheduled to debit from your account.
The general consensus? Paypal may be safer than letting the collector take money from your bank account. But determine whether fees will be charged, and if so, who pays them.
More Tips for Paying Debt Collectors
Verify First, Pay Second. Make sure you actually owe the debt, and that it’s not outside the statute of limitations. “Paying any portion of the debt is generally considered an admission of the debt and will typically restart statutes of limitations,” says Rob Drury, Executive Director, Association of Christian Financial Advisors.
And in this era of debt collection scams, it’s a good idea to verify that the collection agency actually exists and you’re not being targeted by a scam. Ask for verification of the debt in writing, then check with your state attorney general’s office to find out if the agency must be licensed in your state, and if so, that it is. If licensing is not required, try checking with the Better Business Bureau to find out if the agency is registered there.
Don’t Cave In To Pressure. A collector may tell you that you must use the payment method he prefers. Or he may use a high-pressure tactic such as telling you the offer expires very quickly, or threatening to mark you down as “refusing to pay” if you don’t use the payment method he prefers. If you need time to figure out how to pay, stand firm. Refusing to use one of the payment methods listed in this article is not illegal. Take notes of what the debt collector says in case you need to consult a consumer law attorney.
Get It In Writing. If you decide to allow a bill collector to take money directly from your account, make sure you have a written agreement from them first. “It must be in writing with clear terms signed by both parties,” says Daniel Gershburg, a New York bankruptcy attorney.
“Have them email, fax, or mail a letter to you stating the amount they are accepting and how that money will be used: payoff in full, paid off for a lesser amount, or completely removed from your credit report. Take a copy of this letter and attach your check to the letter so there is no question of what should be done once it is received at the collection agency,” suggests Meyer.
Keep Good Records. “Regardless of payment method, consumers should always keep documentation of their payment (i.e., bank records, receipt, statements, etc.),” says Mark Schiffman, Director of Public Affairs for the credit and collection industry trade group ACA International. Keep these records in a place where you can access them easily, and indefinitely. Debts sometimes resurface years later.
Negotiate Fees. “Watch for fees related to payments,” says Tayne. Find out of there is a check by phone fee or other fees related to a particular payment method. If so ask for it to be waived.” Often it can be.
Follow Up. “I cannot stress this more, make sure the payment was entered correctly or received,” says Tayne. “There are so many times when the person taking the payment makes a mistake and the payment does not go through. You want to make sure all payments are received and applied and that the settlement is still valid.”
Make It Official. Want to be extra safe? “Pay your attorney and have your attorney send them a law office check,” suggests Arman. “Even the dumbest bill collector knows better than to screw around with a check drawn on “The Law Office of . . . “. There is also an unassailable audit trail, and the bill collector never gets ANY of your account information.” Of course, that’s assuming you can afford to pay a lawyer, which may not always be the case if you are struggling to pay your bills.