How Can I Settle a Collection Debt?

If a bill goes unpaid for a period of time, there's a good chance it will eventually end up in the hands of a debt collection agency. Creditors use collection agencies in the hope of recovering at least some of what you owe. This can provide you the opportunity to work out a financial settlement that will satisfy both the agency and the original creditor.

Validate the Debt

Before you enter into any discussion with a collection agency, validate the fact that the debt exists and that the agency has been authorized by the creditor to collect it. Ask the agency to send you written documentation such as account statements from the creditor. Order free copies of your credit report from the three major credit reporting bureaus---TransUnion, Equifax and Experian---by visiting AnnualCreditReport.com (see Resources) to check the status of the alleged debt.

Settle or Pay in Full

Once you have validated the debt, your next decision is whether to pay the full amount you owe or settle on a lesser amount. Paying in full won't necessarily raise your credit score, although a debt showing as "Settled" on your credit report could deter future lenders from offering you their lowest interest rate. Chances are, if your financial situation is such that the account went to collections, settlement may be the most likely option for you.

Negotiate

When a creditor assigns your account to a collection agency, it normally does not expect to recover the full amount and will agree to a settlement figure that is a fraction of what you owe. Start your negotiation by offering to pay about half of the outstanding balance, with a goal of settling on a figure of about 70 cents on the dollar. This gives you some room to negotiate and shows the agency you are serious about paying at least some of what you owe.

Payment Plan

When you finally reach settlement figure with the collection agency, you may not be able to pay the amount in full. Work out a repayment plan that is acceptable to both you and the agency, such as paying a specific amount each month. Be sure you get the agreement in writing from the agency. Have the original creditor sign off on the deal to prevent it from pursuing collection of the difference between the settlement amount and the full balance in the future.