Collection agencies and creditors who use collection agencies are interested in collecting some money on accounts that they say are probably not collectible. They may be interested in settling an account that you owe for less than the balance of that account, in exchange for a cash payment. You should be aware of the issues surrounding this type of settlement before you attempt to negotiate with a collection agency.
How Much to Offer?
A collection agency usually purchases accounts from creditors for an extremely small percentage of the original balance, sometimes just pennies on the dollar. The collection agent wants to make a profit from this debt. The older the debt gets, the less likely it is that it will ever be paid in full. Begin with an offer to settle the debt at 25 percent of the balance. You will probably have to pay more than this, but most debts that are in collections can eventually be settled for 50 percent of the original balance, or less.
Lump Sum Payment
Your bargaining power in settling a debt comes from having the ability to pay the debt in a lump sum payment. Before you make an offer to settle a debt, have the cash available to immediately send to the collection agency for payment. If you can pay off a settlement in two or three payments, you can attempt to negotiate this, but most collection agencies will want payment in full of the agreed upon settlement amount.
Paying it Off
Before you send any money to the collection agency, get the agreement that you made with the agency in writing. The collection agency must send you a letter saying that they will accept whatever you are offering as settlement in full for the debt. The account should be identified by the original creditor's name and the account number, if possible. When you receive the signed letter, send your payment. Do not use a personal check, or offer electronic access to your bank account. Send a bank certified check or a money order, and keep a copy of the payment with the agreement letter forever.
Other Effects of Settlement
Although you can save some money and reduce your debt, debt settlement has some negative effects. Debt settlement will usually damage your credit, because the account will be reported as paid for less than the amount due. Many creditors look at this negatively, and it will probably reduce your credit score. You will also owe income taxes on the amount of debt that was forgiven. The creditor will send you a 1099 form, and you will need to claim this as income. If you are in the 15 percent tax bracket and negotiate a discount of $10,000 on your debt, you would owe $1,500 in taxes on this amount.
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