Do Collection Agencies Negotiate Reduced Debt Amounts?

Creditors that cannot collect debts often sell their defaulted accounts to collection agencies. Collection agencies have a reputation for harassing debtors mercilessly until they pay off delinquent debts. Fortunately, collection agencies are frequently willing to negotiate with consumers and accept less than the original amount owed when settling account balances.

Features

Collection agencies purchase unpaid debts from creditors at a reduced rate -- often adding their own fees. The Fair Debt Collection Practices Act also permits collections agencies to add interest charges to any debts, such as old credit card debts, on which interest charges were a part of the account's original contract.

The practice of adding fees and interest pads the company's profit margin when negotiating settlements with consumers. Because of the additional charges some collection agencies add to debtors' accounts, successfully negotiating a reduced debt doesn't necessarily mean you will save money. You may find yourself paying more to settle a debt in collections than you would have had you paid your original creditor in full.

Time Frame

According to MSN Money, once your state's statute of limitations for debt collection passes, the collection agency loses the legal right to sue you. If a collection agency can no longer sue, it cannot force you to pay the debt against your will by garnishing your wages or placing a lien against your home. Because the company cannot take action against you, the only way it can hope to obtain a payment is if you submit a payment voluntarily. Thus, the older a debt is, the more likely a collection agency is to accept reduced payments.

Warning

If a debt collector agrees to your reduced payment offer, getting the agreement in writing protects you from paying off the settlement only to discover that the company denies all knowledge of settling the debt with you.

Some unethical collection agencies will sell the remaining balance of your settled debt to another collection agency. The new owner will then add its own fees and interest charges before contacting you and demanding payment. Protect yourself against this practice by requiring the collection agency to include an agreement not to sell the unpaid balance of your debt to another company in your settlement contract.

Effects

Negotiating a reduced debt with a collection agency will not improve your credit score. The collection account on your credit report will update to reflect that you settled the balance. Although paying off the debt in full results in a notation of "paid," which looks better to other creditors than "settled," paying collection accounts never improves your credit rating.

Exceptions

Although most collection agencies are willing to negotiate settlements with consumers, a collection agency that has recently sued you and obtained a judgment against you won't be so quick to grant you lower payments. A judgment gives the company the right to seize your bank accounts, record liens against your property and garnish your wages. Because it can use these methods to collect the full amount you owe, negotiating a reduced payoff with you does not benefit the company.