By Kenneth Long on February 4, 2010
.jpg.aspx?width=75&height=75) Settling a debt is a complicated endeavor that could result in a lower payoff for certain types of debt. When trying to negotiate a settlement with a collection agency, it is important to understand their objectives so that you know how to approach your negotiation.
In case you do not read the rest of this article, I am letting you know upfront that debt settlement companies are always a bad idea. They rarely deliver what they promise and their fees are always astronomical. Also consider that they get paid first while doing nothing to protect you from imminent legal action. If you still want someone to do it for you, check out some of the debt settlement nightmares experienced by debtors just like you.
There is one other cardinal sin to avoid when trying to settle a debt. Do not acknowledge that you owe that debt. In some states, simply stating that you owe it could restart the statute of limitations on that debt!
To begin, understand that there are a couple of options for communicating with a debt collector. We usuallly recommend communicating through letters for three reasons. First, it is difficult for collection agents to argue with a letter. They might be nasty on the phone, but they can be limited to simply sending you a reply letter to respond to your letter. Second, writing a letter gives you time to develop your thoughts, present your offer and make any revisions prior to contact. Finally, when you receive their letter, you can get the terms of their offer in writing. A verbal promise is worthless, since there is no way for you to prove that any offer exists.
Steps to Negotiate a Lower Settlement Amount
- Prove your hardship. No one will agree to a settlement if they believe you are wealthy. They need to realize that your financial resources are extremely limited. To bolster your claims, state any financial hardships that you have been wrestling with. In addition, show how you are unlikely to see any noticable financial improvement in the near future.
- Advise the collector of your other debts. If there are other debt collectors clamoring for their piece of the pot, then it might be advisable for that collector to take what they can get now.
- Begin with a low ball offer. If you only have enough to settle for 50% of the debt, try offering 30% at the beginning. Negotiation is a compromise where the two parties might come to an agreement somewhere in the middle.
- Get their offer in writing. Once you have an agreement, keep a copy on file for your records. You may then send a payment marked as "final payment" or "paid in full."
- Confirm that your credit record reflects that the debt is now resolved. It will reflect that you settled for an amount less than you owed unless you can also convince the collection agency to delete any negative credit information. This is known as "pay for deletion."
Understand that it takes cash to settle. If you do not have at least 30-50% of the debt amount in cash reserves, then initiating settlement discussion is a waste of your time and could backfire.
When you initiate settlement negotiations with a debt collector, be advised that simply contacting them can lead to an increase in collection attempts. Collection agencies place higher emphasis on collecting amounts from active accounts.
Also, the purpose of settlement is final resolution to the debt. This means a lump sum payment is required. While some debt collectors may let you split this into 2 or 3 payments, this must be accomplished generally within 60 days. Payment plans do little but prolong the debt by extending the statute of limitations, increasing the length of time for interest to accrue and keeping the account on your credit report longer.
If you have multiple collection accounts with very high balances, then you might be better served by contacting an attorney to discuss your options for gaining protection from your creditors. Alternatively, if your debts have not yet gone to collections, then credit counseling is recommended.
For more information, consider using one of our sample letters as a starting point for negotiating your own settlement with a collection agency. |