Can You Settle With a Collection Agency?

Because collection agencies purchase debts from original creditors for much less than the account holder actually owes -- sometimes for mere pennies on the dollar -- they can offer consumers debt settlements and still make a profit. If a creditor sends an unpaid debt you owe to a collection agency, you can often negotiate a settlement that makes paying the debt less of a financial strain.

Time Frame

The older your debt is, the easier it is to negotiate a reasonable settlement with a collection agency. Not only is old debt harder for debt collectors to recover, but if the statute of limitations for collection lawsuits in your state has already expired, the collection agency cannot sue you in an effort to recover the full amount. This makes negotiating a settlement much easier since the company must accept what you are willing to pay or collect nothing at all.

Amount

Collection agencies often send settlement offers to debtors through the mail. If you do not receive a settlement offer that does not mean you cannot call the company and negotiate a debt settlement over the phone. Collection agencies often offer lower settlements to consumers who can pay the settlement via a lump sum rather than through a series of monthly payments.

Credit Impact

While settling a debt hurts your credit scores, it only does so when you negotiate a settlement with the original creditor. Once a collection agency purchases the debt and inserts a collection account on your credit report, settling the debt has little to no impact on your credit scores. This is because the collection account itself is a derogatory entry regardless of whether the account reflects an outstanding balance, a settled balance or a debt that was paid in full.

Warning

Unless you have an agreement with the collection agency to the contrary, the company reserves the right to sell the unpaid balance of your settlement to another debt collector. Making a partial payment on a debt, no matter how old the account, resets the statute of limitations for lawsuits in most states. Thus, requesting the settlement agreement in writing and a zero balance statement from the collection agency protects you from legal action in the future.

Tax Concerns

A collection agency that agrees not to sell the remaining balance you owe will write off the unpaid portion of your debt as a tax loss after the settlement. You are responsible for paying taxes on any debt you owe that a creditor writes off as a business loss. The company will send you a Form 1099 noting the written-off amount and you must include the unpaid debt as income on your tax return.