Debt Consolidation for Collections

Do you have multiple debts with collection agencies? Understand your options and how to successfully consolidate these accounts.

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Managing your everyday finances can be stressful, but adding problems with debt collectors into the mix only makes things worse.

If you’re like most people with collection accounts, you’re not sure how to properly deal with debt collectors. Should you ignore collectors’ calls? Should you agree to a payment plan or offer a lump-sum settlement?

The answer depends on the details of your situation, but for a certain population of debtors, consolidating the debt is the best answer. But before choosing how to consolidate, it is important that you understand all the avenues available.

Why Do Debts Go to Collection Agencies?

If you fall seriously behind on a bill, the company you owe money to may send your bill to a debt collector. Each company has its own policy on how many missed payments it takes for an account to be sent to collections, but it typically happens once you miss five or more payments.

Disputing a Debt in Collections

Before you take any action to resolve your collection debt, make sure it’s legitimate and it belongs to you.

That means you’ll need to be careful when you interact with debt collectors. Without confirming any details about yourself or the debt, request verification information. Debt collectors are required by law to send you the following information, either by email or mail:

  • The name of the original creditor.
  • The amount currently owed.
  • If applicable, the account number(s) for the debt.
  • How the balance was calculated, including interest and fees.
  • The debt collector’s contact information.
  • Your deadline to dispute the debt.

Once you receive this information, you have 30 days to submit a written dispute. You can find sample dispute letters at Be sure to gather any supporting documentation you have and review your credit reports to confirm the information before sending your letter.

You’ll also want to check and see if you have a legitimate reason not to pay the debt. For example, if the statute of limitations has passed in your state, which is the amount of time a creditor or debt collector has to take legal action against you, you no longer have a legal obligation to pay it back.

The Impact of Having Debt in Collections

Having debt in collections can impact you in a few different ways. The consequences range from negligible to severe, depending on details of the account. For example, medical collection debts under $500 are no longer reported to the credit bureaus and have no impact on your credit scores.

Here’s how other collection debts can impact you:

  • Credit score damage: Collections accounts can cause a major drop in your credit scores. The damage is most severe right after a new account appears on your reports and lessens as time goes by, and some versions of your credit score may improve if you pay off the balance.
  • Difficulty obtaining new credit: Having unpaid collections on your credit reports can make it difficult to get approved for new loans and credit cards. If you are approved, you could have trouble qualifying for low interest rates, especially if your debt went to collections recently.
  • Legal trouble: If a debt collector sues you for the money you owe, you could end up with a wage garnishment or a lien against your property. There’s no minimum debt balance required for a collector to sue you, but the more you owe the more likely a lawsuit is.

What Does Debt Consolidation Do?

Debt consolidation involves consolidating multiple debts into one account, usually by paying them off with a new credit card or loan. By paying off old accounts, you transfer the debt to a single new account, ideally one with better terms (e.g., lower interest rates, fees and/or monthly payments).

There are also paid financial services and nonprofit programs like debt management plans that allow you to “consolidate” into a single payment at a lower monthly rate. The nonprofit agency collects your monthly payment from you and distributes it to creditors on your behalf.

Options for Consolidating Debt in Collections

Even if you legitimately owe a collection debt, and the statute of limitations on your debt has not passed, consolidating the debt with a loan or credit card could be a bad idea.

Why? Because you’ll likely end up moving your low-risk, zero-interest (in the case of some collections) debt to an account with high interest rates and fees. On top of that, if you fall behind on the new account, you’ll do more damage to your credit reports and scores.

So before proceeding, carefully consider these options:

Credit Counseling

For most people, the best way to manage collections debt doesn’t involve opening up a new credit card or loan at all.

Instead of moving your debt to a new account, you can talk to a credit counselor to get professional advice on how to deal with your collections accounts.

A certified credit counselor can not only help you determine whether you really need to pay the debt, but they can also coach you on how to communicate with debt collectors and resolve the debt for as little money as possible.

Debt Consolidation Loan

If you’re determined to use new financing to pay off your collections, a loan is one of the best options to consider, since loans have much lower interest rates on average than credit cards. In 2023, the average APR on a 24-month personal loan was 12.17%, versus nearly double that (21.19%) for credit cards.

The downside of this solution is that you have to get approved by a lender first. Getting approved for a loan can be a problem when you have low credit scores, which is often the case for people with multiple collection accounts.

Balance Transfer Credit Card

Opening up a credit card to pay off debt is usually a very bad idea, since credit card debt is more expensive to pay off than most other debt.

However, some credit cards offer 0% interest on specific transactions for a limited period of time after you open the card. This includes balance transfer credit cards, which give you 0% APR on debt you pay off with the new card within the introductory period.

But proceed with caution before going this route. These types of credit cards often give you 0% APR on either balance transfers or purchases, but not both, and there’s a chance that a collection bill won’t be categorized as either. So if you do plan to open an account, read the fine print and/or ask the credit card issuer if debt collections qualify for the 0% interest offer.

On top of that, you typically need good-to-excellent credit to qualify for a balance transfer credit card. lf you do happen to qualify, you’ll still want to weigh your options, since balance transfer fees usually amount to 3%-5% of the transfer amount.

Debt Settlement

With debt settlement, a third-party works with your debt collectors on your behalf to make a new payment arrangement, with the goal of paying less than the full amount you owe.

You can hire a for-profit debt settlement company to negotiate settlements for you, but it’s not recommended. Going this route means making monthly payments for up to four years before any settlements are negotiated. In the meantime, you can accrue more interest and fees on the debt and still face legal action from collectors. Plus, there’s no guarantee the negotiations will be successful.

A better alternative is nonprofit debt settlement, which doesn’t involve negotiations at all. Instead, your collectors and creditors agree upfront to a specific settlement amount (usually 50%-60% of amount owe), which you pay over a three-year term.

Benefits of Consolidating Debt in Collections

Depending on the details of your debt, you may see some benefits from consolidating your collections. The positive outcomes can include any or all of the following:

  • If you pay off medical collection debt, some versions of your credit score will improve.
  • Offering to pay most of your collection debt all at once can help you negotiate a settlement for less than the full amount you owe.
  • You can reduce the number of collections accounts/payments you have to manage.
  • Improve your chances of being approved for financing in the future.
  • Alleviate financial stress.

Understand Your Rights When Dealing With Debt Collectors

Many people consider paying off old debts just to get obnoxious debt collectors off their back. But offering them money isn’t the only way to solve this problem.

There are laws in place to stop debt collectors from harassing you. For example, they’re not allowed to talk to your employer about your debt, use profanity or threaten you, or call you more than seven times in seven days. If they do break the law, you have the right to file a lawsuit, and you could even receive payment for damages you suffer as a result of their harassment.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via


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