When your debt goes to collections, the original creditor has written your balance off as a loss after roughly 120 to 180 days of missed payments and has either hired a collection agency or sold the account outright to a debt buyer. From that point, a new company is contacting you, a fresh negative mark lands on your credit report, and the collector can eventually sue you, win a judgment, and garnish your wages. Federal law sets firm limits on what collectors can do at each stage, and knowing those limits is the difference between reacting badly and protecting yourself.
How the Handoff Actually Works
A charge-off is an accounting move. The creditor reclassifies your balance as a loss on its own books, but you still owe the money. What changes is who collects it.
If the creditor hires a collection agency, the creditor still owns the debt and the agency works on commission. If the creditor sells the account, a debt buyer takes over all rights to collect and the original creditor drops out of the picture entirely. Either way, the next voice on the phone is not the company you originally borrowed from, and the amount they claim you owe may include added interest and fees.
The First Letter and Your 30-Day Window
Within five days of first contacting you, a collector has to send a written validation notice showing the current amount of the debt, the name of the creditor, and an itemization of how the balance was calculated.1Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts That notice is your starting point.
You then have 30 days to dispute the debt in writing. Send a written dispute inside that window and the collector must stop all collection activity on the disputed amount until it provides verification, usually a copy of the original contract or an account statement showing the balance history.1Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts If the collector cannot verify the debt, it cannot keep trying to collect it.
One catch trips people up. Collection activity can continue during the 30-day period until you actually send the written dispute; the pause only kicks in once the collector receives it.2Consumer Financial Protection Bureau. What Information Does a Debt Collector Have to Give Me About the Debt If the debt looks wrong or unfamiliar, get the letter out fast.
What Collectors Are Allowed to Do
The Fair Debt Collection Practices Act draws hard lines around collector behavior. Calls are limited to between 8 a.m. and 9 p.m. in your local time zone. Collectors cannot use profanity, threaten you with arrest, or call your number repeatedly just to harass you. If you tell a collector your employer prohibits personal calls at work, the calls to your workplace have to stop.3Federal Trade Commission. Fair Debt Collection Practices Act Text
You can also shut communication down entirely. Send a written letter demanding that the collector stop contacting you and it must comply. After receiving that letter, the collector can only reach out to confirm it is closing the file or to notify you that it plans to take a specific legal action such as filing a lawsuit.4Office of the Law Revision Counsel. 15 USC 1692c – Communication in Connection with Debt Collection A stop-contact letter does not erase the debt. The collector can still report it to the credit bureaus and can still sue you. But the phone calls end.
If the Collector Breaks the Rules
If a collector violates the FDCPA, you can sue for your actual damages plus up to $1,000 in additional statutory damages per case. A court can also award attorney’s fees and court costs on top, so pursuing an abusive collector does not have to come out of your pocket.5Office of the Law Revision Counsel. 15 USC 1692k – Civil Liability Save voicemails, keep letters, and write down the date, time, and content of every call.
What It Does to Your Credit
A collection account shows up on your credit report as a separate negative entry, on top of whatever late-payment history the original creditor already reported. The hit is steep, especially if the rest of your file is clean, and it can affect loan approvals and interest rates well before the mark ages off.
Under the Fair Credit Reporting Act, a collection account can stay on your credit report for seven years. The clock starts 180 days after the original delinquency that led to the collection, not from the date the collector first reported it.6Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports If the debt is sold from one buyer to another, that seven-year window does not restart. A collector that reports a fresh date to make an old debt look newer is breaking the law.
If anything on your credit report is inaccurate, you can dispute it directly with the credit bureau. Once notified, the bureau has 30 days to investigate and either correct the item or delete it if it cannot be verified.7Federal Trade Commission. Fair Credit Reporting Act
Medical Debt Is Treated Differently
The three major credit bureaus voluntarily stopped reporting paid medical collections and unpaid medical collections under $500 beginning in 2023. A CFPB rule finalized in January 2025 would have removed medical debt from credit reports entirely, but a federal court vacated that rule in July 2025 at the joint request of the CFPB and the plaintiffs challenging it.8Consumer Financial Protection Bureau. CFPB Finalizes Rule to Remove Medical Bills from Credit Reports Unpaid medical collections above $500 can still appear on your report, though the entry has to be coded so it does not reveal your specific provider or the type of treatment.
How Long the Collector Can Sue You
Every state sets a deadline for lawsuits over unpaid debt. Statutes of limitations run anywhere from three to ten years depending on the state and the type of debt, with six years common for credit cards and other written contracts. The clock usually starts on the date of your last payment or account activity.
Once that deadline passes, the debt is time-barred. Federal regulations prohibit a collector from suing you or threatening to sue you over a time-barred debt.9Consumer Financial Protection Bureau. Section 1006.26 – Collection of Time-Barred Debts The collector can still ask you to pay voluntarily, but the enforcement teeth are gone.
Watch out for one trap. In many states, making even a small partial payment or acknowledging the debt in writing can restart the statute of limitations and reopen the door to a lawsuit. Before you send a dollar on an old account, figure out where the clock stands.
If You Get Sued
Inside the statute of limitations, a collector can file a civil lawsuit. The FDCPA requires it to be filed either in the judicial district where you live or where you signed the original contract.10Office of the Law Revision Counsel. 15 USC 1692i – Legal Actions by Debt Collectors You will receive a summons and complaint, and you have to respond within the deadline printed on those papers.
Ignoring the lawsuit is the most expensive thing you can do. If you do not respond, the court enters a default judgment against you and the collector wins automatically without having to prove anything.11Consumer Financial Protection Bureau. What Should I Do If I Am Sued by a Debt Collector or Creditor The judgment typically adds interest, attorney’s fees, and court costs to the original balance. Respond, and the collector actually has to prove the debt is valid, which opens room to negotiate or raise defenses.
Undoing a Default Judgment
If a default judgment was entered because you were never properly served, or because something outside your control kept you from responding, you can file a motion to vacate. Courts generally consider improper service, excusable neglect, and a void judgment as grounds for relief. Deadlines for these motions vary by state, so acting quickly matters. If the court grants the motion, the case restarts and you get to defend on the merits.
Wage Garnishment and Bank Levies
A judgment unlocks tools the collector did not have before. The most common is wage garnishment: your employer is ordered to withhold part of your paycheck and send it directly to the collector.
Federal law caps garnishment for consumer debt at the lesser of two numbers: 25% of your disposable earnings for the pay period, or the amount by which your weekly disposable earnings exceed 30 times the federal minimum wage.12Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment With the federal minimum wage at $7.25 per hour, that floor is $217.50 per week. Earn $217.50 or less in weekly disposable income and your wages cannot be garnished at all. The “whichever is less” rule protects lower earners more than the flat 25% cap suggests.
Several states set garnishment limits tighter than the federal cap, and a handful prohibit wage garnishment for consumer debt entirely. Others cap it at 15% to 20% of disposable earnings. Your state’s rules apply whenever they give you more protection than federal law.
Bank Levies and Protected Income
A judgment creditor can also pursue a bank levy, freezing funds in your checking or savings account and turning them over to satisfy the debt. The levy hits the balance at the time it is served on the bank; later deposits are not caught by that specific order, though the collector can seek additional levies.
Certain income is protected even after it lands in your account. Social Security benefits are generally exempt from levy or garnishment by private creditors, with exceptions for federal tax debts and court-ordered child support or alimony.13Social Security Administration. SSR 79-4 – Levy and Garnishment of Benefits Veterans Affairs disability payments and Supplemental Security Income carry similar protections. If your account contains only exempt funds, you can challenge the levy, but banks hold frozen funds only briefly before releasing them to the creditor, so speed matters.
Settling for Less Than You Owe
Collectors often accept less than the full balance in exchange for a lump sum. Settlements of 40% to 60% of the balance are common, though the number depends on the age of the debt, what the collector paid for it, and how much leverage you have. A debt close to the statute of limitations, or one the collector bought for pennies on the dollar, gives you more room to negotiate.
Get the settlement terms in writing before sending any money. The letter should state the settled amount, confirm that payment satisfies the debt in full, and specify how the account will be reported to the credit bureaus. Without written confirmation, you risk paying and then being chased for the remainder by a different collector who claims the debt was never fully resolved.
A payment plan is also possible when a lump sum is out of reach. Collectors usually prefer slow payment to none. Just make sure the agreement lays out the total amount, the monthly payment, and the date the debt is considered satisfied.
The Tax Bill You Might Not Expect
Forgiven debt does not simply disappear. If a creditor cancels $600 or more, it must file Form 1099-C with the IRS and send you a copy.14Internal Revenue Service. About Form 1099-C, Cancellation of Debt The IRS treats the canceled amount as taxable income, so you owe income tax on money you never received in hand.15Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments
There is an important exception. If your total liabilities exceeded the fair market value of your assets immediately before the cancellation, you were insolvent, and you can exclude some or all of the forgiven debt from your income. The exclusion is capped at the amount by which you were insolvent. If you had $50,000 in liabilities and $40,000 in assets, you were insolvent by $10,000 and could exclude up to that amount. You claim the exclusion by filing Form 982 with your return.16Internal Revenue Service. Instructions for Form 982 Debt discharged in bankruptcy is also excluded from taxable income under a separate provision. If you settle a large balance, check whether you qualify before you file.