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There are 7,060 collections agencies in the U.S.—here's what to do you if your credit card debt is sent to one

CNBC Select got tips from a financial planner on how to prevent your debt from winding up in collections — plus what to do in case it does.

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Collections agencies buy your unpaid credit card debt from your card issuer when your balance lingers too long — but that doesn't mean it goes away.

When a collections representative from your credit card issuer calls you, it's usually because you haven't made at least the minimum payment for at least 30 days. But if you've let it go unpaid for months, your issuer could pass it on to one of over 7,000 third-party collections agencies in the U.S.

There are a few things you can do to stop this process before it even starts. For instance, a number of card issuers — including AmexBank of AmericaChase and more — have stepped forward to offer financial assistance programs in light of the coronavirus pandemic.

But in case you are among the 1 in 3 Americans with delinquent debt, it's worth knowing how debt collection works, understanding your rights and how to get help when you need it.

Select spoke with Shelly-Ann Eweka (CFP, ChFC), a wealth management director at TIAA, who shares everything you need to know about debt collections.

What is a collections agency?

"A collection agency is a company that is hired by lenders, creditors, medical providers and federal and local governments to get you to pay or make arrangements to pay what you owe them," Eweka tells Select.

The most common types of debt that go to collections are credit card balances and medical bills, but there are many other reasons why people go into debt. Rent, student loans and tax debts are other examples of what can get passed on to a collections agency.

According to Debt.org, there are three phases to debt collection:

  1. You are past-due, or delinquent, on your bills and your card issuer's collections representative calls you to pay your overdue balance. After about six months (depending on the lender), they will give up.
  2. Next, your creditor passes it to a third-party agency that's separate from your card issuer, but contracted through them. If the agency gets you to pay your debt back (plus interest and late fees), it gets a commission.
  3. If the agency is unsuccessful, your creditor sells your debt to a collections agency (sometimes known as a debt buyer) for pennies on the dollar. At this point, your creditor is cutting its losses and is no longer involved. The collections agency tries to get you to pay back as much of the original debt as possible so it can make a profit.

There's 'no set rule' on how long it takes for your debt to go to collections

Six months is the general guideline, but according to Eweka there is "no set rule" on how many times you'll get a phone call or letter before your debt is turned over to an agency.

"Sometimes, companies use collection agencies to service their debt collection process from the beginning, and other times it can take a longer amount of time," says Eweka.

Check your credit report at least once a year to reduce any surprise calls from collections, Eweka says. "Sometimes people do not even realize they have some of their debts."

The three major credit bureaus (Experian, Equifax and TransUnion) are offering free weekly credit reports for the next year. They are available on AnnualCreditReport.com through April 2021.

How to avoid having your debt sent to collections

If you've recently lost your job or incurred an unexpected expense such as a medical bill, there are resources to help you juggle debt repayment.

"The best thing to do to avoid having your debt going to collections is contact the creditor to set up a payment plan or ask for reduction on the amount of debt owed," says Eweka.

Do this as soon as you know you're going to have trouble paying your bills, and you could benefit from a lower APR, temporary forbearance or deferment, waived late fees or other accommodations depending on your financial situation. Be sure to tell your creditor about any financial hardships you're experiencing, such as a recent layoff, furlough or reduction in working hours.

"Remember that the amount of debt forgiven may be taxable when you file your tax return," advises Eweka. And before you enroll in any type of financial assistance, consider what's best for your situation.

Don't miss: Here's the 'most basic rule of thumb' when it comes to paying off your debt, according to an expert

Do this if your debt is already in collections

To start digging out of debt that's already in collections, "get some help quickly," says Eweka. Contact the National Foundation for Credit Counseling (NFCC) and ask to work with a nonprofit credit counselor.

With the counselor's help, call the collections agency and arrange a payment plan so the delinquent marks roll off your credit report as quickly as possible. It can take up to seven years for your past-due history to disappear completely off your report, but as you work toward settling outstanding debts your score will consistently increase with time.

Even if your debt is already in collections, debt collectors are not allowed to lie to you, threaten you, use obscene language or harass you by phone. However, a new report from Pew Charitable Trust found that increasingly, collections companies are taking debt settlements to civil court. The study shows that, from 1993 to 2013, the number of debt collection lawsuits steadily doubled — from at least 1.7 million cases to 4 million cases nationwide.

And although laws vary state by state, collections agencies are generally not allowed to use unfair practices like adding fees and interest on top of what you owe (since they're already making a profit from it), nor can they threaten to take your property through illegal means. However, they may be able to leverage the legal system in surprising ways, like suing you or freezing your assets.

A large majority of debt lawsuits (over 90%) are against individuals who don't have legal representation. Yet "consumers with legal representation in a debt claim are more likely to win their case outright or reach a mutually agreed settlement with the plaintiff," cites Pew's report. If you find yourself in this situation, know you can seek free legal advice and/or pro bono counsel by looking up nonprofit legal aid organizations in your state.

Read more: These newlyweds paid off $21,000 in credit card debt by following their own rules—here's exactly how they did it

Try a balance transfer card to get out of debt

If your debt has not gone to collections yet, one option to help you save tons on interest and pay it off more quickly is to use a balance transfer credit card that offers 0% interest for a certain length of time (anywhere from six to 21 months). The options below all require at least a good credit score, so they are usually only effective to use before your debt falls into delinquency.

The Citi Simplicity® Card lets you pay off debt over a long period, with a 0% intro APR for 21 months on balance transfers from date of first transfer (after, 18.99% - 29.74% variable APR; balance transfers must be completed within four months of account opening). There is an introductory balance transfer fee of 3% or $5, whichever is greater for transfers completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).

Find out more about how 0% APR cards work and how to make the most of your balance transfer..

Information about the Citi Simplicity® Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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