When a debtor doesn't pay his bill, the creditor pursues him for money at first, but eventually it will assign the debt to an outside collection agency. If you still do not pay the bill, the account will probably be sold to a debt buyer or another collection agency. A collections company will work to collect at least a percentage of the money owed.
Why Settle?
A collection agent is paid a commission for collecting the debt that is listed with them. If the original creditor still owns the account, but is using a collection agency to help collect the debt, the agency can only settle for a lower amount if the creditor allows it. If a debt buyer has purchased the account, it may be more likely to settle for a percentage of the balance. This is because the debt buyer has bought the account, probably at a large discount.
Current or Recent Debt
If you are current on a bill, the creditor will not settle that bill for less than the amount that you owe. Creditors only settle bills that they don't believe that they will receive payment any other way. If you are current, the creditor has no incentive to settle. If you are up to 90 days behind, the creditor may make some concessions on interest or late charges, or accept a lower payment, but it still will believe that since you paid recently, you will pay again soon.
Aged Debt
When enough time has passed since the last payment, the creditor will write the account off its books. This is strictly an accounting term, and does not refer to your obligation with respect to the debt; you still owe the money. This usually happens at around six months since your last payment. A creditor is more likely to settle for a percentage off at this time than it was before. At this stage, you can try to settle the debt for between 50 and 70 percent of the original balance, depending on the creditor and your negotiating skills.
Very Old Debt
Once a debt passes the second anniversary of no payments, many collectors and debt buyers look at it differently. At this stage, creditors view the debt as nearly worthless. A junk debt buyer may purchase this debt for literally pennies on the dollar. It will buy many of these accounts in a batch from different creditors and collection agencies. The buyer will try to reach people who owe these accounts, or even people who might owe on one of these debts, and try to get them to pay. When debt is at this stage, you can often negotiate settlement in full for as low as 25 percent of the original balance.
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