Before you pay one dime to a collection agency, try negotiating a better deal. Everything is negotiable. Never allow a collection agency to tell you anything different. By offering a lump-sum payment, you could easily cut your debt in half.
Even if you are unable to offer a lump-sum payment, you can still insist on a reduced debt amount with monthly payments.
Debt collectors purchase consumer debt for pennies on the dollar from an original creditor. Let’s say you have unpaid credit card debt from Chase. Once the unpaid debt is charged-off it may be sold to a debt buyer. The debt buyer purchases 1000s of unpaid accounts from Chase for pennies on the dollar. The debt buyer then attempts to collect the full amount of the debt from you. There is a ton of potential for much profit to be made by the debt collector if they can get you to pay in full. This is perfectly legal.
But why shouldn’t you negotiate a better deal since the debt buyer paid a few cents for the account? If you are planning to pay a debt collector, here are several reasons and tips to negotiate a better deal:
Debt buyers purchase debts for pennies on the dollar
How much a debt buyer pays for an account 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.
Statute of Limitations may have passed on the debt
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 can negotiate with confidence but more importantly, you can consider leaving the debt unpaid (debt collectors hope you don’t know this). The ball is in your court.
Debt collectors just want to get paid
Offering a single lump sum payment is a great way to go. Debt collectors want your money as soon as possible, and they may be willing to settle for less if you agree to one big payment. Some debt collectors will offer to settle if you pay 40 to 60 percent of the amount due. But it is a good idea to start very low, for example, offer no more than .25 cents on the dollar. You may have experienced some debt collectors 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 debt collector 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.
Negotiate entire debt
During your negotiations you want to make sure you negotiate the entire balance in full. Some debt collectors 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.
The older the debt, the lower your settlement offer. The debt may be on its second or even third round of debt collectors. This is good news for settling debt for pennies on the dollar. Now you know for sure the second or third debt collector has paid even less for the debt.
Be prepared for an IRS 1099C Notice
After settling debt for less, consumers may be blindsided by receiving a 1099-C “Cancellation of Debt” tax notice. The IRS considers forgiven or canceled debt as income. Debt collectors that agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS and to send debtors notices as well. Not all debt collectors will send an IRS 1099C Notice. The debt collector may not be able to prove you owe the debt since the account may have been transferred multiple times from debt collector to debt collector. Junk debt buyers may choose to avoid sending you a 1099C notice. It is best to inquire before you send a settlement payment. If you receive a 1099C notice make sure you consult your tax preparer.
Secured debt typically cannot be negotiated
Secured debt such as your home or automobile makes it a lot harder to negotiate a lesser settlement. As a rule, you can only settle unsecured debt. Secured debt has real property collateral attached to it and if you cannot make payments the creditor can simply repossess or foreclose to cover the debt. With unsecured debts, there is nothing “attached” to the extension of credit to be used as repayment in case of default.
Negotiate a deletion from credit reports
Settled collection accounts will most likely do nothing to improve your credit scores. If you can get the debt removed from your credit file in exchange for payment, even payment in full, it may be worth it to you in order to get the derogatory account deleted. The reason settling a derogatory account almost never has a positive impact on credit scores is because current FICO credit scoring models are built to predict the likelihood of whether a consumer will miss payments in the future.
Settling an account does not erase the fact that the default occurred and, therefore, usually does nothing to raise a consumer’s credit scores. A settled negative account remains a negative part of your credit report. Once the current version, FICO9, is implemented, the scoring formula will ignore all collection accounts that have a zero balance, regardless of whether it was paid or settled. But most lenders and credit card companies will not implement the newest version of FICO for a few years from now.
If you cannot get a full deletion then at the very least request the settled account be updated to “Paid as Agreed” or “Paid/Settled” because many banks won’t approve your credit card or loan application as long as you have outstanding collection accounts on your credit reports. There may even be employers who won’t hire you for certain jobs if you have unpaid debts on your credit report. A $0 balance is going to look far better than one that’s still delinquent.
Negotiations and Agreements should be in writing
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.” Keep excellent records when negotiating with a collection agency and always mail the correspondence certified, return receipt mail.
Keep your financial information private
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. The U.S. Postal Service sells money orders. Be sure to keep a copy of the cashier’s check or money order.