About Debt Reduction Negotiation

Debt reduction negotiation typically involves creditors and consumers. Individuals with consumer debts, such as credit cards, medical bills and personal loans, may negotiate to settle their debts, usually with collection agencies. Debt negotiation for homes and automobiles is not as common, because the debts are secured, which means creditors can foreclose houses or repossess cars if borrowers fail to pay.

Collection Agencies

Most collection agencies purchase debts from creditors for pennies on the dollar. Although collection agencies try to get you to pay the original debt in full, they will usually accept lower amounts. Avoid negotiating with collection agencies by telephone. Instead, send letters by certified mail so you maintain a record of your correspondences. When sending a payment in full, clearly notate on the check or money order that "in accordance to the agreement with [agency], this payment = payment in full for account [number]."

Offers

Before making an offer, understand your rights. Try contacting your state's attorney general or the National Consumer Law Center (Consumerlaw.org) for additional information. Assess your finances to evaluate how much you can afford to pay without incurring additional debts. Negotiation starting points will vary, but a good rule of thumb is to start with 25 percent of the original debt. Keep in mind that collection agencies usually purchase accounts for 5 percent of the original debt amount after the original creditor has unsuccessfully attempted to collect the debt. It is best to offer a figure that you do not expect to be accepted, as you may be pleasantly surprised or at least have more room to negotiate than if you had offered 80 percent of the original debt.

Tips

Remain calm during the negotiation process, especially if your initial offer is rejected. Do not pay anything in accordance with your final settlement until the collection agency provides the terms in writing. Otherwise, it will be difficult to defend the settlement if the collection agency later denies the terms. Remember to include the credit-reporting procedure when you negotiate your terms so the collection agency will make timely reports to the major credit bureaus stating that the debt is no longer outstanding.

Many individuals have encountered harassing, aggressive collection representatives. The federal government has enacted consumer protection legislation specifically designed to protect individuals with consumer debts. For instance, the Fair Debt Collection Practices Act prohibits collection agencies from contacting you before 8 a.m. and after 9 p.m., unless you have agreed to other times. Collection agencies must stop contacting you after you inform them in writing that you do not want to receive any more communications.