How Much Should I Settle on for a Debt Collection?

Collection agencies make money by purchasing uncollected loans, credit card accounts and other bills from the original creditors. Then debt collectors harass the debtors with telephone calls, demand letters and even lawsuits to get the money. They usually demand payment of the entire bill, and sometimes they add fees and interest if you agreed to allow that in your original contract, but Steve Bucci of Bankrate explains that they often settle for less.

Process

Collection agencies take over accounts when the original creditors deem them not collectible and write them off, which provides them with tax benefits. This generally happens within six months of payment delinquency, according to MSN Money writer Liz Pulliam Weston. Debt collectors step in to buy the accounts for less than face value. Collection agencies make money by squeezing as much as possible from you, as long as they get more than they paid for your debt. They do not disclose that amount to you, and they initially demand payment in full.

Settlement

Debt collectors are often willing to settle your debt for a steeply discounted amount, as long as they make some profit. Bucci advises that many accept as little as 50 cents on the dollar, as long as you can pay it in one lump sum. Get any agreement in writing, including a clear statement that the amount represents payment in full and that the collection agency will not resell the debt. Withhold payment until you receive the written terms.

Credit Reporting

Settling for a discount with a debt collector, or even paying the original amount due, does not help your credit reports. Experian, Equifax and TransUnion all report the initial delinquent debt and the collection agency account. Insist on removal of the collection account as a condition of your settlement, Melanie Smith of the Military Money website advises. A "settled" or "paid" status hurts your credit score, while total removal of the entry removes its effect.

Warning

Ignore settlement offers from debt collectors pursuing old bills that are past your state's statutes of limitation for collections. Debts can be legally collected for three to 15 years, depending on where you live. Collection agencies have no legal power to force you to pay once the time frame expires, although the NOLO legal website warns that they often try to get money through intimidation and lies. You restart the collection time if you give them any money, or even admit to the debt and agree to a payment schedule, so do not deal with scavenger collectors.