Part 1 in our Debt Settlement Series
Some people have expressed skepticism that you can actually do debt settlement on their own using our strategy or other creative methods of settling debts. Read letters from readers who were highly successful. You can also watch our video on how to settle your debts.
Note: This page addresses debt which is with a collection agency (CA). For debts still with original creditors (still with the credit card company and NOT with a collection agency), go here. How do you know if your debt is still with the original creditor (OC) and not with a collection agency? Simple: call the credit card company.
If a debt is with a collection agency, the original creditor is not going to deal with you. The OC has collected its tax benefits under US tax law for bad debts. They have “cut the ties” with the debt.
Now that we’ve explained the difference between a past due debt which resides with a CA vs. an OC (collection agency vs. original creditor) – are you in the right place? You’re sure your debt is with a collection agency? If the answer is yes, then you are now reading the right article.
All of this material is covered in our ebook, “How to Settle Your Debts”, by the way.
Understanding the True Risks and Realities of Overdue Debts
Most consumers hit the panic button over notifications from collection agencies:
Fact 1.
Many consumers are unaware of their risks with unpaid debts. Yes, it’s true that a creditor could sue you in court and win a judgment, allowing the creditor to garnish your wages or hire a sheriff to come get your property. However, the chances of this are not as big as you think.
It’s true that collection agencies are turning to lawsuits more and more these days, but I would still tell you not to worry. Once you make the creditor aware that you know the law, they are more likely to leave you alone. With savvy consumers, many debt collectors think it is simply too much time and expense for them to take legal action against a debt.
We don’t want to lie to you, the possibility of a lawsuit does exist. You might want to take comfort in this: if they do take you to court, often they have no case. There are a lot of new players out there, like the Junk Debt Buyers. These guys buy and sell debts and place them into million dollar packages which sell on Wall Street, much like the secondary mortgage market derivative packages.
If push comes to shove and the collection agency won’t settle your debt and decides to sue you, we have all the information you need to fight the lawsuit and win.
Fact 2.
Too many consumers feel their debts are overwhelming and there is nothing they can do other than file a bankruptcy. Consumers believe those awful tales spun by collection agencies of impending doom, especially about garnishment and seizure of property. Collection agents fail to mention (surprise!) that in order for these actions to take place, the creditor must first go to court.
Due to lack of information, many consumers get panicky and turn to bankruptcy in these situations. Please don’t do this! Bankruptcy should not be used until after all options are exhausted, including the settlement procedures we are going to talk about here. In addition to getting out of your debts by settling, see our other alternatives to filing a bankruptcy. In some cases, having your debt go into collections can be a blessing!
Next, before we go into the actual process of settling your debts, let’s see if we can get rid of the debt in other, simpler ways.
Have You Tried Debt Validation?
The best way to deal with a collection agency is the debt validation method. This should be your first step in the settlement process.
Check the Statute of Limitations on the Debt
Before you attempt to settle a debt, check the statute of limitations. Collectors only have a certain amount of time to sue you for payments! If your debt is too old, the collector can’t take you to court. You can determine if the statute of limitations for collecting a debt in your state have past.
If you find the debt is older than the statute of limitations, tell any bill collector calling you they are wasting their time by harassing you for an uncollectable debt, as neither they nor the original creditor nor the assigned collection agency can take you to court to get a judgment.
Don’t Confuse the Statute of Limitations With the Amount of Time a Collection Can Stay on Your Report
After seven years (in most cases), a negative mark and the related collections will disappear from your credit report. If the debt has gone unpaid for 7 years, then it can no longer legally remain on your credit report. Before the seven year mark, you must challenge this listing on your credit report to get it off. To see how long a negative item remains on your report, click here.
However, even though a debt may no longer legally appear on your credit report because it’s too old, you could still be sued if the statute of limitations for your debt in your state is not up.
If the debt is gone from your credit report via debt validation AND the statute of limitations is up on this debt, you’re home free!If your debt meets both of the above conditions, it is uncollectable and it cannot appear on your credit report! If you get to this point, stop here, you are done – don’t worry about the debt!
My Debts Are Not Past the Statute of Limitations, I Don’t Want to go Through Debt Validation, and I Need to Settle Them
If you cannot wait for the statute of limitations to pass on a debt, and you don’t feel like messing with the debt validation procedure, you may consider trying to settle your debts yourself with a collection agency.
Before we start, lets get some terms straight here. A collection agency is any agency which collects a debt on behalf of another company. Under these terms and federal law, this includes:
- Companies who purchase the debt, also known as junk debt buyers.
- Companies who has been assigned to collect the debt.
- Lawyers who send you letters to collect a debt (don’t panic – they’re not suing you, yet!).
Debts Which are Good Candidates For Settlement
For the purpose of this article, there are two basic categories of debt: secured and unsecured.
Unsecured Debts include:
- medical bills
- credit cards
- department store cards
- personal loans
- student loans
- bounced checks
Secured Debts include:
As a Rule, You Can Only Settle Unsecured Debts
With a secured debt, a piece of real property (such as an automobile or a home) is promised if the debtor can’t finish making payments, or defaults, on the loan. You will not be able to settle these debts, as the creditor will simply accept the promised property as the “settlement.” As a matter of fact, with a home or auto loan, you most likely won’t be reading this information – your property will just be repossessed or foreclosed on.
With unsecured debts, there is nothing “attached” to the loan promised as repayment. Unsecured loans are typically given to people with good credit, due solely to the fact that they have good credit. These are the type of debts that a creditor is willing to settle, as they have no way to guarantee they will receive anything from you.
Another reminder: This page addresses debt which are with a COLLECTION AGENCY ONLY. For debts still with ORIGINAL CREDITORS, go here.
How to Get a Creditor to Make the Deal You Want
You have the natural advantage in debt settlement, because you have something the creditor wants. Don’t cave in when they first tell you no. Remain calm and don’t lose it and get angry. It’s usually best to correspond with them via letters, so you have a paper trail of all your actions. Keep the attitude at all times that the collection agency will take less money then they say they will. Source: Sean McVity, portfolio broker at Keefe, Bruyette & Woods.
How Much Should You Offer to Settle Your Debt?
To give you some background, most bad debt companies pay or receive literally pennies (or less) on the dollar for the debts on which they are trying to collect. The amount that companies pay for bad debt depends on the type of account and its age:
- Debts that have recently been charged off: 6 to 7 cents on the dollar.
- Accounts that are slightly older and on which a collection agency or two has already taken a whack: 1.5 cents to 2 cents on the dollar.
- Years-old, out-of-statute debts: A penny or less.
Other data showing old debts sold for 3 cents on the dollar
| Buyer |
Bought debt worth: |
Paid: |
Cents on $ |
| Asset Acceptance |
$4.2 billion |
$102.3 million |
2.4 |
| Encore Capital Group |
$5.9 billion |
$195.6 million |
3.3 |
| Portfolio Recovery Associates |
$5.3 billion |
$149.6 million |
2.8 |
Source: 2005 SEC filings.
With this in mind, you should always start your offer at 25% or less. Let’s understand the math here. If your debt is $1,000, let’s say at the most, the collection agencies has paid or will collect 7 cents on the dollar, or $70. If you offer them $250 (25%), they are still making a profit of $180. Remember, the credit card companies are out of the picture at this point. This money goes directly to the collection agencies.
You can also try the Pay For Delete Method on small collection amounts.
Important Tips When Negotiating Your Debts
- It’s best not talk to a collection agency on the phone. I used to say never, however, if you want to get vital information from the collection agency, or even “feel them out” for what they would take as a settlement, go ahead. Just keep your finger on the hang-up button on your phone in case they start getting nasty.
- If you do call them, start off the conversation by getting the physical address of the collection agency, the name of the agency, and the direct line. The fax number is good, too.
- Get your terms in writing before you even consider making a payment. Here is a sample of an agreement requesting the reduction of your debt amount. Never expect a creditor to meet an agreement that was made verbally. Everything must be in writing and, even then, you will probably have to fight to make the creditor live up to his end of the bargain.
- The older the debt, the smaller the settlement. Logically, if they have called you 50 times and gotten no response, most likely they are going to move on to a better prospect. The collection agency may also choose to sell or assign the debt to a new collection agency for even less money, or temporarily ignore the debt. The course of action chosen by the creditor will vary widely between corporations and debts.
- Don’t agree to payments. This is always a bad idea. If you make payments to a collection agency, little things like extra interest or handling fees could keep your balance from ever going down. In some cases, making a payment restarts the statute of limitations. Wait until you have one lump sum. Remember, the older the collection, the more eager they will be to settle. If they are hounding you, get rid of them by sending a cease and desist letter.
- Keep good records. This can be the difference between a good and bad settlement. Don’t expect them to remember you or what you agreed upon.
- Send all correspondence via registered mail, receipt requested (about $5-$6 a letter). This doesn’t require a trip to the post office, you can use the US Postal Service’s onle Click and Ship service.
- Keep a copy of every letter you send.
- Keep a log of when you spoke to the agencies, and who you spoke with. Ask for the name of the supervisor of the person you spoke to, as the turnover rate at collections agencies is high.
- Follow up all phone correspondence with a letter (registered, of course).
- Penalties and extra interest are typically fictitious amounts of money added on by the collection agency to pad their profits. I’ve seen as much as to 50% of the debt or more claimed to be owed by a collection agency consisting of interest and fees. Example: Recently, I talked to a guy who had his $5000 original debts balloon up to $11,000 in less than 3 years. This is illegal, every state has usury laws (which dictate the maximum interests allowed to be charged.) If you consider the junk debt buyer paid 7 cents on the dollar or less, there is no way there is this much interest.
Most companies would be thrilled to get you to pay the original debt even without the extra penalties they add on and will usually be more than agreeable in waiving these fees.
- Never look too eager to settle. Take plenty of time to reach an agreement. Never let it slip that you need to settle the debt because you’re buying a home, car or anything else. If, for example, you tell a creditor that you really need to get this debt settled to get into your dream home, you can forget any kind of settlement. The creditor will insist on the full balance.
Try not to accept the first, or even second, settlement offer (unless of course, it’s really good). If the collection agency is the one calling YOU to push the deal forward, you have the upper hand. You cannot expect to reach an affordable settlement if the creditor thinks he is in the driver’s seat.
- Once you hand over the cash, all the wheeling and dealing is over. If you forgot to negotiate the way the listing appears on your credit report, guess what? You’re out of luck. Make sure you’ve gone over your agreement with a fine tooth comb.
What If You’re Contacted by More Than One Collection Agency for the Same Debt?
If you’re contacted by more than one collection agency for the same debt, it means that the original creditor has hired a secondary or even tertiary collection agency. This indicates that the original creditor and even the first collection agency has given up on you. This means that the second collection agency has paid even less for the debt than the first one. If the agency hasn’t been able to reach you by phone but knows that you are receiving its letters, it may be willing to take even less.
Should You Threaten Bankruptcy?
Use the threat of bankruptcy. It will be in your best interest if the creditor believes that you have very little money and you are teetering on the edge of bankruptcy. You should approach each creditor as though this is their last chance to compromise, and get something out of your debt, before you declare bankruptcy and they get nothing.
Be careful when doing this, however. If you accumulate any more debt after stating this to a creditor, (and they record all of your correspondence and phone calls), you may not be able to discharge this debt within bankruptcy.
Negotiate Your Credit Rating With the Creditor
The next thing you should do is negotiate your credit rating with the creditor. This is very important as a “paid” collection is as negative to your credit rating as an “unpaid collection.” All your negotiation efforts and hard cold cash will do nothing to rebuild your credit report if you neglect to negotiate your credit rating in the process. Here’s how to do it.
