If you want to negotiate with debt collectors, you should go in knowing that they have one of the most difficult jobs in the world.
They call debtors all day long trying to get them to pay back debts they don’t want to pay. They send letters in the mail threatening to sue debtors if they’re not paid back. And, they report collection accounts to the credit reporting agencies for all to see.
But have you ever considered that debt collectors are simply doing their jobs trying to recover money rightfully owed to their clients?
If you’re receiving calls from debt collectors and you know you owe the debt then it’s not a bad idea to work with them to negotiate a settlement agreement. A settlement allows you to make good on your debt but not have to pay it in full after you negotiate with debt collectors.
Here are five tips to help you get the most bang for your buck when it comes to negotiating before, during and after your settlement with a debt collector:
1. Do your due diligence
Before you begin to negotiate with debt collectors, it’s important to do your due diligence.
First, begin by asking them to verify that the debt is valid, which they are required to do per federal law.
It’s also a good idea to make sure that the debt collector with whom you are speaking is indeed employed by a legitimate collection agency. Do some Internet research to ensure that they are a real collection agency and all phone numbers and addresses match. This will help to eliminate any fraudulent attempts to collect monies you don’t owe.
If you became aware of the collection account because it was on your credit reports then it’s less likely to be a fraudulent attempt to collect money from you. If, however, you received an unsolicited phone call or letter from a collector and you have no idea who they are or what they want, then you’re going to want to proceed with caution.
2. Check your statute of limitations
There are two separate statutes of limitations, or SOL, which a consumer needs to be aware of when it comes to negotiating a settlement on a collection account: the credit reporting statute of limitation and the debt collection statute of limitations. Contrary to popular misconception, the two statutes of limitation have nothing to do with one another.
The credit reporting SOL refers to how long a derogatory account is allowed to remain on a consumer’s credit report, which is seven years from the date of default on the original account. The debt collection SOL determines how long creditors are allowed to sue a consumer in an effort to collect an unpaid debt.
Each state has its own SOL that determines how long you can be sued for unpaid debts and when it becomes “time barred.” Depending on the state where you lived when the debt was incurred, your unpaid debts will become time barred somewhere between three and 15 years.
If you’re going to negotiate with debt collectors, it still may be a good idea to settle a time barred debt, especially if you plan to apply for new credit in the future such as a mortgage. However, be sure to settle any time barred debts in one lump sum so that you do not re-open the door to be sued.
3. Save your money
Settling collection accounts when you negotiate with debt collectors allows you to save a ton of money.
It’s important to understand that collection accounts are typically bought for mere pennies on the dollar relative to your original debt amount. Because debt buyers purchase defaulted debt in bulk this allows them to purchase any single debt at a very low unit price.
When you negotiate with debt collectors and settle with a collection agency even for a fraction of the original debt amount, you are affording the collection agency the opportunity to make a sizable profit.
Since the debt was purchased at such a low price, collection agencies are usually willing to settle collection accounts for considerably less than the original amount owed. You can use this knowledge to your advantage to help negotiate your debt at the lowest price possible.
If the debt has already been time barred (see tip #2) then you have even more bargaining power to land a better settlement offer since you have the knowledge that the collection agency no longer has the ability to sue you.
It’s not a bad idea to start at 10-20% of the amount owed when you negotiate with debt collectors. The collector will be appalled at the low-ball offer but it sets the table on what you’re willing to pay. Further, even at 10-20% of the original amount the debt collector stands to make several hundred percent profit.
4. Keep a paper trail as you negotiate with debt collectors
The importance of getting verification of your debt in writing has already been mentioned (Tip #1). However, the debt verification letter is not the last piece of paperwork you will need to request.
Once you agree on a settlement amount with a collection agency it’s in your best interest to get the offer in writing prior to making a payment as you negotiate with debt collectors.
It’s also wise to mail your payment to the collection agency in the form of a check rather than paying your settlement through an electronic payment method. Paying with a paper check allows you to stay more in control and it reduces your risk of any unauthorized payments being removed from your account. Plus, once the check has been cashed you can print or save a copy of the canceled check as proof of payment.
After the settlement has been made it’s also a good idea to request a receipt for your records. If the account balance is not updated properly on your credit reports you can always dispute the error by sending a copy of this receipt to the credit bureaus.
5. Understand the credit implications
Settling or even paying a collection account in full will not remove the account from your credit reports. Collection accounts are legally allowed to remain on a consumer’s credit report for seven years from the date of default on the original account. That means if you settle an account that is only two years old then the account is still going to hang around on your credit reports for another five years.
Finally, if you were expecting to see a credit score boost from paying off collection accounts then you may be in for a very unpleasant surprise after you negotiate with debt collectors.
Many times settling or paying a collection account does not have any positive impact upon a consumer’s credit scores whatsoever.
The FICO credit scoring models do not care so much about the balance of your collection accounts as much as it cares about the fact that you had collection accounts in the first place. The fact that you had a collection account indicates that you are an elevated credit risk, despite the fact that the collection was paid, and therefore continues to have a negative impact upon your credit scores. The VantageScore scoring system, on the other hand, ignores collections that have been paid or settled in full.
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