Settling Debt in Collections

Once a debt goes to a collection agency, it is a sign that your original creditor has given up on you ever paying that debt. Collection agencies are a little more optimistic. They are betting that they can collect at least a portion of the debt.

The collections agency often gets a percentage of the money they collect. That means the collections agency only makes money if they can collect from you before you file for bankruptcy. Given that something is better than nothing, collection agencies have a significant incentive to negotiate a settlement on debts in collections.

You may be able to negotiate a settlement that is as low as 50 percent of the debt owed. In general, the longer a debt has been in collections, the more likely it is that the collections agency will be willing to negotiate a settlement.

However, if the collections agency knows that you need to clear up the debt in order to buy a house or get some other loan, they will not have any incentive to negotiate and may not reduce the debt at all.

Therefore, you should not seem too eager to settle the debt. The collection agencies first offer of settlement can usually be improved upon. Making a counter-offer will usually get them to further reduce the settlement amount. Always ask collections agencies to drop any late penalties or accrued interest as part of your negotiations.

Be sure to also negotiate credit reporting as part of the settlement. In the best case scenario, you can get a collections agency to delete the debt from your credit report. This requires some effort on their part, so it may not always be easy to get a full deletion. If this is the case, make sure the debt is immediately marked as “Paid as agreed” on your credit report.

When talking to collection agencies by phone always take detailed notes, including the date and time of the call and the name and title of the person with whom you spoke. It is a good idea to have a fax available when you speak to the collections agent so that the settlement agreement can be signed by you and the agency immediately upon agreement. Alternatively, you could conduct all negotiations in writing.

Pay the settlement immediately. However, do not give the collection agency or any creditor a personal check. If you are having financial difficulty, you do not want any creditor to have access to your bank account information. If you use a money order or cashier’s check, do not get them from your home bank.