Most debts that are assigned to debt collection agencies are unsecured debts that do not have any collateral attached to them. Examples of such debts include credit card debt, medical bills, telephone bills, payday loans, gym dues, health club memberships, unsecured lines of credit, lawyer fees, etc. If the creditor is flexible, it might be willing to accept a lump sum settlement below the full amount to avoid spending months of collection efforts and expenses. Here are 2 key points to remember when negotiating debts with collection agencies:
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* The collection agency did not originally lend you the money or extend credit to you. Therefore, it does not really care if you owe $100 or $1,000; it just wants to maximize its return on its total debts outstanding which is usually a percentage of what it expects to collect.
* Time is money for debt collection agencies. Every time they call, they are spending money, resources and time; thus this makes them motivated to get you to pay as much as you can and as fast as possible; which is almost always less than 100%. This works in your favour because debt collectors are almost always willing to settle for less than 100% of the debts you owe.
Here are 2 things to watch for when communicating with debt collection agencies:
i) If you do not have cash to make a realistic lump sum offer or any proposal to make a payment plan, do NOT even talk to the debt collector because you could make promises that you cannot fulfill which leads to more trouble.
ii) Or worse off, you might reveal confidential information that could turn an old debt in to a totally new debt thanks to your statement. This is usually done by revealing information that your debt collector did not already know.
Offering a Lump Sum Payment to Creditors
If you offer a lump sum payment to debt collectors, be sure to understand that no standard or general rule applies to how much you should offer; it could be 70%-80% of the debt, 50% of the original debt or even 30% or less, depending on the nature of the debt. Usually debt collectors who have given up on you will be willing to settle for 30% or less of the original amount owed. Before you make an offer for lump sum payment, pick the lowest amount you are sure you will be able to pay and stick to it. This is because once the collector sees you agreeing to one amount; it will try to talk you in to paying more. Do NOT agree to pay more, stick to your original amount!
Also note that a debt collector will be motivated to settle with you if you can pay all at once in the form of a lump sum payment. For instance, if you owe $1,500 on the debt and offer to settle at $900, the agency will take its cut of say $100 to $200 and pay the remaining balance to the original creditor (who would have written off the debt as a business loss) to close its books or accounts receivable.
If you the debt collection agency agrees to settle the debt with you for a certain amount, be sure as a condition of your paying that the collector will remove the debt from your credit report put a "PAID in FULL" note to it. If the debt collector says that this is not up to him but up to the original creditor, be sure to ask for the name and phone number of the person with the original creditor who has the authority to make this decision.
After obtaining that person's phone #, call him and plead! Explain clearly that you are taking steps to repay your debts, improve your creditor score and become financially responsible. Emphasize that a clean credit score will help you achieve your goals. Most importantly, be honest with your words and do NOT provide a description of your finances. Explain unfortunate circumstances that have forced you to settle the debt for less than you owe; examples include medical illnesses, job layoffs, car repossessions, huge back taxes, etc. If you are considering filing bankruptcy, say so clearly. However be sure NOT to incur any new debt after mentioning bankruptcy as it may not be discharged through your bankruptcy case. This typically occurs if the creditor can prove that you incurred these debts knowing you will file bankruptcy after, thus creating a moral hazard on your part.
As mentioned above, if the debt collection agency agrees to settle for less than you owe, be sure it agrees to report the debt to the 3 major credit bureaus as "Paid in Full." In this regard, make sure you get a written confirmation that this has been done. Also, an alert letter should be sent to you when this information has been sent to the credit bureaus such as Equifax, Experian and TransUnion.
If you are contacted by a second debt collection agency, offer much lesser than you have to the first collection agency. If you are contacted by more than one collection agency for the same debt, this means the creditor has hired a secondary collection agency. The creditor and at least one collection agency have given up on you and sold off their debts for less to a third party. A collection agency that buys your debt at this point in the timeline will usually agree to settle for 50% to 60% of the original amount owed and will be more willing to negotiate terms with you.
If you offer to make monthly instalments, the collection agency will have little motivation to settle for less than the full amount because it still has to dedicate resources, time and money to chase you for payments. In fact, most collection agencies know that debtors will stop paying their dues a month or two after initial debt settlement. Thus, before a debt collection agency agrees to accept monthly instalments, it may require you to fill out asset, income & expenses report. If you agree to do this, here are 2 things to watch out for:
i) You could be giving the collection agency more information about you than it had previously, and that will not be to your benefit. By revealing your income & expense report to the collection agency, you would be doing more harm than good.
ii) Never lie to a collection agency. You might be signing these forms under a penalty of perjury and if you happen to lie on these forms and the creditor later sues you; your lies will work against you in your case.
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