How to settle debt with collection agencies for pennies on the dollar

settle-debt-pennies-on-dollarDebt collectors purchase consumer debt for pennies on the dollar. That debt the original creditor attempted to collect from you for several months just may have ended up in the hands of a junk debt buyer. The debt can be anything from a credit card to a medical bill. Junk debt buyers purchase old, bad debts that have been written off as uncollectible by the original creditor.

There may be several reasons why you want to settle an old debt. But the first thing you should consider is debt validation. Debt validation forces a collection agency to prove you owe the debt. Have you verified you actually owe the debt? The collection agency must produce documentation, from the original creditor, that establishes you owe the debt.

If you are sure you want to move forward with debt settlement take into consideration the following tips:

Debt buyers purchase debts for pennies on the dollar
The collection agency purchases bad debts or charged off debts for pennies on the dollar. How much they pay depends a lot on the age and type of debt. Recent debts can be purchased for .6 to .7 cents on the dollar and older accounts can be purchased for as little as .2 cents on the dollar. Rarely should there be any reason for you to pay the full dollar amount requested by a debt collector.

Check the statute of limitations
Every State has a statute of limitations on debt. Once the statute of limitations has passed, you can no longer be sued for the debt. A debt collector can continue to attempt collection; however, there is no legal recourse they can pursue. Without threat  of legal action, you may want to consider leaving the debt alone.

If a collection agency contacts you after the statute of limitations has passed making a partial payment on the debt could restart the statute of limitations. Learn more about the statute of limitations.

Start your offer low
Now that you know collection agencies purchase debts for pennies on the dollar, it’s time for that savings to be passed onto you. Start your offer low, no more than .25 cents on the dollar. You may have experienced some collection agencies that include a settlement offer of a 50% discount in their first communication with you. If they can offer 50% off in their initial dealings, then rest assured offering .25 cents on the dollar or less is reasonable.

Keep in mind the collection has added additional interest and fees on the debt. Even at a low offer the collection agency will still make a profit from the debt.

All negotiations should be writing
Never speak to a collection agency over the telephone. Put all your negotiations in writing. Make sure the correspondence includes the words “full payment on the debt” and “complete discharge of all monies due.” Be aware that the difference between what you owed and what you settle for can be listed as taxable income for IRS purposes. Keep excellent records when negotiating with a collection agency and always mail the correspondence certified, return receipt mail.

The older the debt, the lower your settlement offer
Your debt may be on its second or even third round of collection agencies. You may have been contacted by a few different collection agencies for the same debt. This is good news for you. It indicates the original creditor and the first collection agency has given up. Now you know for sure the second collection agency has paid even less for this debt. This is a good position to be in to settle for pennies on the dollar.

Collections on behalf of the original creditor
If the creditor has not yet written off the debt and hires a collection agency to collect the debt, it may be more difficult to negotiate for pennies on the dollar. The collection agency has not paid for the debt, but was likely assigned the debt. In this case the collection agency wants to maximize their collection in order to get a percentage of what they collect for the original creditor.

You should still offer to pay a lump sum at 25% of the original debt. Stick to your guns, because once a collection agency realizes you are willing to pay something, they assume you can be talked into paying more. Your first offer may be turned down; however, you should continue to negotiate, in writing, at small increments.

Negotiate entire settlements
During your negotiations you want to make sure you negotiate the entire balance in full. Some collection agencies will settle for less then turn around and hire another collection agency to collect the difference. This is illegal in some states. You may want to check with your State’s Attorney General in order to confirm whether a collection agency can settle, then have another collection agency go after the balance.

Avoid sending the collection agency any money until you get a faxed or scanned letter saying they’ll accept your payment and that the payoff will absolve you of any future legal obligation for that debt. After you get that, you’ll have to send over the money within a day or two. If you do not have the cash readily available do not agree to a settlement.

Get Deletions
Paid collection entries do not improve your credit score. It may even bring it down. If you can get the debt removed from your credit file in exchange for paying a little more, do it. Some collection agencies even have a “pay for deletion” fee. After a settlement collection accounts can still remain on credit reports for seven years from the date of the original charge-off unless you request a deletion.

The collection agency may delete their entry entirely but the original creditor may still show a charge-off. Negotiate the negative entries from the original creditor also. At the very least you want the original creditor to show as “Paid as Agreed,” or “Account Closed/Paid as Agreed” and request any derogatory remarks taken off your credit report. See Deletions

Secured Debt
Secured debt such as your home or automobile makes it a lot harder to negotiate a lesser settlement. The debt is secured by real property and if you cannot make payments the creditor can simply repossess or foreclose to cover the debt.

Never let the collection agency know where the money is coming from
First, it’s none of their business, but more importantly, if you mention you are getting a settlement, tax return, or borrowing money from relatives, they may be unwilling to accept a lesser amount and press you for the entire debt.

If you are negotiating over the phone (why are you negotiating over the phone?) make sure you take excellent notes and send a confirming letter, certified, return receipt and keep a copy for your records. The letter should state that the collection agency is accepting the lump-sum payment in settlement of the entire amount you owe.

Do not give a collection agency your bank account or debit card number
Pay off the settlement with a cashier’s check or a money order, preferably from another bank. Some banks will not sell you a cashier’s check unless you are an account holder. The U.S. Postal Service sells money orders. Be sure to keep a copy of the cashier’s check or money order.

Do not disclose your place of business
You do not want a collection agency bugging you on your job and you definitely do not want a collection agency knowing where you work in case you are sued. Do not make it easy for them to get a judgment and wage garnishment against you. It’s not likely that collection agencies will go this far as the costs involved in pursuing a lawsuit are expensive but nevertheless, keep as much information about you as private as possible.

Settle Debts with Original Creditors


  1. Lisa, What if the collection agency refused to accept the letter and deletion from the report, but still saying if paid will show on the record as paid.. That they have no power of removal from the credit report.

    I recently made a request just like this and offered them to pay in full if they willing to remove and sing the agreement letter. Ofcourse they refused..


  2. Thanks Lisa, I really benefit from the information you provide. Thanks so much for your honesty about my options when dealing with creditors. Please continue to educate the public regarding credit reporting laws and policy. It has already benefited my efforts in staying focused on my credit. Thanks again :-)

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