Don't ignore that debt collector

2. When it's your debt, but it's outside the statute of limitations.

Every state limits how much time a creditor has to sue borrowers over a debt. The limits vary by state and type of debt, as I explained in "Is there a statute of limitations on debt?"

If the limit has expired on your debt, a collection agency may still file a lawsuit, but to beat the case you would just have to show up in court and point out that the debt is too old.

In many cases, though, you can stop further collection attempts by sending a cease-communications letter that points out the statute of limitations on the debt has expired and that you don't want to be contacted about the debt again.

You may have to repeat this exercise every time the debt is resold to a new collector, however.

Also, you want to be dead-sure you're correct about the statute, Detweiler said. Consider consulting with a consumer-law or bankruptcy attorney.

If you want to permanently end collection attempts, you should consider offering the collector a settlement if you can. See Situation No. 4, below.

3. When it's your debt, but you can't pay it.

Here's where you need to tread carefully, Detweiler said. You don't want to provoke the collector into filing a lawsuit against you, which could result in the garnishment of your wages or the seizure of your bank accounts or other assets.

That doesn't just mean not hiding from collection calls; it also means not making promises you can't keep.

"Do try to stay in touch," Detweiler said. "But don't say too much. Something like, 'I can't pay right now; I've lost my job. I'll touch base with you in a month.'"

If the collector presses you, which is likely, just keep responding: "I can't pay right now. There's nothing else I can do."

Don't let yourself be cajoled into making even small payments if it means neglecting more-crucial bills, such as rent, utilities or the payment on the car you use to get to work. For more details, read "How not to pay your bills."

Also, don't raid retirement funds, which are protected by law from creditors, or home equity, which is also often sheltered. If you're tempted to resort to these measures, or your best attempts to avoid being sued fail, talk to a bankruptcy attorney about your options. A bankruptcy filing can stop collection efforts and help you reduce or erase your debts.

"A lot of people wait too long to consult a bankruptcy attorney," Detweiler said. "They wait until after they've made an expensive mistake."

The only time you shouldn't be worried much about lawsuits is if you're "judgment-proof." That status varies somewhat by state, but generally it means that your only source of income is Social Security or disability payments, which are untouchable by most creditors, and that you don't have any assets that can be taken. Again, it's smart to consult an attorney to make sure you know where you stand (bankruptcy attorneys often offer free initial consultation).

4. When it's your debt, and you can pay at least some of it.

If a bill has gone to collections, paying it won't do much good, if any, for your credit scores, as I explained in "When paying bills can hurt your credit."

And many times you'll be dealing with a collection agency that bought your debt from the original creditor for pennies on the dollar. You can always try to get the account returned to the creditor, but often the company that originally extended you credit won't accept any payments and will refer you back to the collection agency.

You should also know that your original debt may have been inflated by interest, fees or the sheer whim of an unethical collector.

You may still decide to pay off your old debts in full and arrange payment plans with the collection agencies. What may be smarter, though, is to make lump-sum settlement offers.

"A collector may well take 35% (of what it says you owe) just to get it in a lump sum and be done with it," Detweiler said.

There's no magic formula for what you should offer, although the older the debt, the less the collector may be willing to accept. "Start lower than what you can pay and negotiate," Detweiler recommended.

Also, make sure you get a letter from the collection agency that it will accept your payment as full restitution for the debt and that it will not resell any unpaid portion. Another point to negotiate, if you can, is the removal of the collection account from your credit reports. You should get these promises in advance and in writing before sending the money.

5. When a collector has gone over the line.

Negotiating or even talking reasonably with a collector can be impossible if the person is shrieking obscenities at you, threatening you with arrest, telling your friends and neighbors about your debt or harassing you with repeated phone calls.

• Drowning in debt? Ask a credit counselor, free, on MSN Money's message board

All of those actions are violations of the federal debt-collection laws and signal that you're dealing with an unethical collection agent who can't be trusted to keep his or her word.

You may have better results asking to speak to a supervisor. If the collector just hangs up, only to restart the harassment later, you'll probably want to consult a consumer-law attorney about your options, which may include suing the collector who's breaking the law.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated June 16, 2009

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