Because debt collectors pay pennies on the dollar to buy your debt does not mean you can use that as an argument to pay less to settle. Even though a small amount paid to a debt collector represents a profit, you might have a better chance of settlement if you start by offering 30% to 40% of the total as a negotiation point.
Whatever amount you agree on just make sure you get the debt collector to delete the collection account in exchange for payment. You won’t be able to get the original creditor to erase the original delinquency (charged-off account) but you may be able to get the collection agency to remove the collection account.
6 tips to help when negotiating settlement:
1. State a hardship. You can certainly state that they paid pennies on the dollar for the debt but it’s really not necessary since they already know what was paid for the debt. You will be better off explaining a hardship. A job loss, divorce, illness, a decrease in pay, natural disaster…you get the point. Explain your situation so the debt collector can understand you don’t have the money to pay the debt in full.
2. Offer a lump sum if possible. Choose the amount you want to offer but you’ll be in a better negotiating position if you offer a lump sum to settle. If you have to make payments offer less than you can actually pay in order to still get a discount.
3. Negotiate how unpaid portion of debt will be handled. Keep in mind the debt collector could end up selling the unpaid portion of the debt to another collector or report the unpaid portion as “forgiven debt” to the IRS which may cause the IRS to send you a tax bill. The IRS considers the unpaid portion of the debt as income if the debt collector reports it. Negotiate with the debt collector not to report the unpaid portion of the debt to the IRS.
4. A good time to approach the collection agency is at the end of the month. Some debt collectors work on commission and may be willing to negotiate in order to meet collection quotas. Every time a debt collector contacts you, it’s spending money. There is a strong interest in getting you to pay as much as you can as fast as possible. Turn that interest around by offering a quick pay-off but for a decreased amount.
5. Take the emotion out of negotiations. Don’t take anything a debt collector says to you personally. It’s just a business. Treat debt settlement like a business. Responding to snarky statements is a waste of time; they do not know you. NEVER feel guilty or shameful about unpaid debt. Banks, lenders, credit card issuers and finance companies know a certain percentage of borrowers will default – life happens. Debt collectors are simply a part of that matrix.
6. Put everything on paper. Don’t get caught up in the negotiations to the point you don’t get things in writing. Trust no one. Debt collectors lie all the time to get payment. Any agreement you make with a debt collector must be cemented in writing in advance of sending any money. All negotiations and conversations should be documented with good notes, dates and times.
7. Keep your financial institution a secret. NEVER agree to postdate a check or agree to have automatic payments drawn from a bank account or charged to a credit card. Give the debt collector as little information as possible about your finances. DO NOT reveal your banking institution or bank account number. Payment for debts should always be in the form of a cashier’s check or money order.