The thought alone makes people lose sleep at night, and for good reason. I'm sure you've heard the horror stories — collectors making threats of jail time, or calling employers, neighbors and friends in an attempt to shame a debtor into paying up.And while it's true that some companies use scare tactics like these (which, by the way, are illegal), for the most part, it's just a bad rap. Collection agencies are not without boundaries, and since 1996, have been regulated nationally by the Fair Debt Collection Practices Act. On top of that, most states impose a few rules of their own.But as a consumer, it's important to be familiar with your rights in case a collector comes calling. You may think your shiny payment history means this doesn't apply to you, but debt collection isn't reserved for people who make a habit out of skirting their credit card bills. Let one medical bill slip through the cracks (or a library book, for that matter) and you may very well get a call from a collector. Here's what you need to know — and do — before you respond:Verify the debt
This is absolutely the first thing you should do when you receive a call from a debt collector. Why? For starters, it buys you a bit of time that you can use to get a game plan together. But it's also an assurance that what they're trying to collect really is a debt you incurred, in the exact amount you owe. Within 30 days of receiving a note or phone call about an unpaid debt, write a letter explaining the situation: You don't recognize the charge, you thought it was paid, or it seems a bit heftier than you remember. "If you raise a specific issue about the claim they're making, you should get a more focused response from them," says Robert Hobbs, deputy director at the National Consumer Law Center and author of “Fair Debt Collection.” They'll verify the debt in writing, and in the meantime, you can brush up on your rights.Recognize empty threats and crossed linesAs I said, debt collectors are restricted in how, where and when they can contact you. The Federal Trade Commission says that collectors can get in touch by phone, mail or fax (they also allow for telegram messages, but I'd say the likelihood of that happening is slim). They can only call between 8 a.m. and 9 p.m., and have to honor your request not to call you at work. But they're also restricted in what they can say, says Gerri Detweiler, a credit adviser for Credit.com and author of “The Ultimate Credit Handbook” (Plume, 2003). Don't believe a caller who threatens to have you arrested or garnish your wages. "They can't take that kind of legal action unless they go to court first," explains Detweiler. That is a lengthy, not to mention expensive process, so if you're told you're risking jail time if you don't pay up by the end of the week, call them on their bluff.NegotiateTruth be told, the debt collector doesn't want to call you daily, spend money on postage or take you to court — especially take you to court. What they want is money, so you're in a prime negotiating position. Start off by explaining that you want to make good, but you have other expenses to consider. Then offer them a dollar amount that works within your budget, but is still reasonable. For a recent debt that was incurred within the past year or two, Detweiler says to start your negotiations at 50 percent of the balance. If it's older than that, start a bit lower with 20 or 25 percent and work up from there."When you do reach a payment agreement, make sure you get it in writing, and never allow them to take the money directly out of your bank account," she warns.Beware of really old debts
As crazy as it sounds, paying on what Detweiler calls "zombie debts," which seem to come back from the dead, can be a big mistake. "It can start that clock ticking again and basically force you to pay on a debt that you shouldn't have had to pay, or that you could have negotiated," she explains. In general, these blemishes stay on your credit report for seven and a half years, but each state has its own statute of limitations that dictates how long a debt collector has to sue you for the amount owed, anywhere from about five to 10 years. The clock starts at the last recorded activity, so if you make a payment, negotiate a debt, or in some cases even just acknowledge it, you could inadvertently turn back time. Bottom line: Be sure to understand your state's policy before you take any action. If it turns out that you're better off not paying, you might consider donating the amount to charity to settle the moral side of this issue, says Hobbs.
Get your credit back on track
Once you've reached an agreement with the debt collector, get everything in writing, including the amount you paid, confirmation that the company received that payment, and an acknowledgment that you've made good on what you owed. Keep this for five to seven years if it was a fairly new debt or three to four if it was old, advises Hobbs. Then, start getting that credit score up. Pay your bills on time every month. Keep your utilization ratio, which compares the amount of debt you owe to the amount of credit you have available, down. And don't shop around for credit, which means saying no to the cashiers who offer you a discount when you open a new store card this holiday season.
With reporting by Arielle McGowen.
Jean Chatzky is an editor-at-large at “Money” magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .