When you become delinquent on a debt to a business or creditor, the debt may be sold to a third-party debt collector. The debt collector can contact you to settle the debt and can even file a lawsuit against you if you won’t pay.
If you don’t think the debt is legitimate, you may be able to dispute the debt and get it dismissed entirely. But, if the debt is legitimate, it’s generally a good idea to settle it so that it shows up as paid on your credit report and to avoid a potential lawsuit.
The good news is that you can potentially negotiate a lower payoff amount.
Do Debt Collectors Negotiate?
Debt collectors may be motivated to settle for a lower payoff amount or a long-term repayment plan. In many cases this is preferable to a prolonged collections process or a lawsuit, which takes time, costs money and doesn’t guarantee a successful outcome for the debt collector.
Whatever you do, don’t ignore the debt even if you think it’s a mistake. Taking care of debts in collections as they occur can be better for your credit and finances in the long run. You can potentially avoid severe consequences like a lawsuit resulting in a court judgment. Plus, you can move on from the collection faster.
How to Negotiate with a Debt Collector
Don’t ring up the debt collector and pay the full amount owed as soon as you hear from them. Follow these steps to try and help negotiate a better deal:
1. Gather Information About the Debt
First, you need to verify that the debt is legitimate before you pay it. When a debt collector first contacts you, they need to provide a letter within five days that includes:
- The amount you owe
- The name of the debt collector and/or original creditor
- Instructions for how to request more information or dispute the debt
Once you receive this letter, you have 30 days to ask for more information. The debt collector may then have to stop collections activity until they verify that the debt is legitimate and send you more information. Alternatively, they can provide you the contact information of the original creditor.
You can also go through your own records, including bills and correspondence with the original creditor, to gather information about the debt.
2. Determine What Leverage You Have
If the debt collector can prove that the debt is legitimate and it belongs to you, it’s a good idea to negotiate a settlement as soon as possible. But there are several ways you can establish leverage:
- The statute of limitations has passed. Debts are only legally enforceable for a certain amount of time. Once the statute of limitations has passed and the debt becomes time-barred, the debt collector has no power to force you to pay. They may not inform you the debt is time-barred, and if you get sued you need to show it is time-barred in court. While you may want to pay a time-barred debt because you believe it is the right thing to do, you now have some bargaining power to negotiate a lower payoff amount.
- The debt has fallen off your credit report. Negative information, including unpaid accounts in collections, can be removed from your credit report after seven years. If you have an account in collections that has fallen off your credit report (or will fall off soon), you have less incentive to pay the full amount.
- The debt collector has less to lose. Debt collectors often purchase debts from the original creditor for pennies on the dollar. This means they may not worry as much about collecting the full amount.
Generally, the older the debt is the more leverage you have. Make sure to gather as much information as you can on the debt. Identify how old the debt is, research the statute of limitations in your state and verify how long the debt has been on your credit report.
3. Decide How Much You Can Pay
Before you contact the debt collector to negotiate, figure out how much you can afford to pay. Make sure to take all your other financial obligations, like rent, bills and other debts, into account.
Take a look at your budget or create one if you don’t have one. Write down your monthly income and compare it to your outgoing expenses and leave some wiggle room on top for unexpected costs. This can give you an idea of how much you have left over each month to pay toward your debt.
Decide what you are willing to pay to settle your debt. This can be in the form of a lump sum payment, which could be a portion of the original amount owed, or several payments over time. Whatever you do, don’t offer to pay what you can’t afford.
4. Start Negotiating
Now it’s time to start negotiating with the debt collector. Before you call them, write down what you are going to say so you don’t get flustered or confused while on the phone. Explain your financial situation and try to work out an alternative repayment plan, which can look like one of the following:
- Lump sum partial repayment. You offer to pay a one-time lump sum at a portion of the debt owed. For example, you may offer $1,000 to settle a $4,000 debt. Start with a low-ball amount and be prepared to hold firm at the maximum amount you’re willing to accept.
- Payment plan. You offer to make a small monthly payment over time to settle your debt. You may still be able to negotiate a lower total payoff amount or have to pay the full amount owed to negotiate a long-term payment plan.
Make sure you start the negotiations lower than what you can afford because the debt collector might make a counteroffer. Remember that you may need to have several conversations with the debt collector before you reach a final payment amount. Keep notes of all your conversations, including who you spoke with and what was discussed.
5. Get Everything in Writing
Don’t pay a penny to the debt collector before you get your negotiated settlement in writing. When you pay the debt collector, request written documentation that states you have settled your debt. You may need this later.
6. Check Your Credit Report
Accounts in collections show up on your credit report and can negatively impact your credit score. They stay on your credit report for up to seven years from the date of your first missed payment, whether or not the debt is paid. But you want to make sure the account shows as settled once you’ve paid it off.
Creditors can likely view paid accounts more favorably than unpaid ones, because it shows that your debts have been settled.
When a few months have passed after you paid the debt, make sure that the account has been updated accordingly. If it hasn’t, you can contact the credit bureaus to address the inaccurate information. This is where it can come in handy to have a written statement from the debt collector that you settled the debt as well as other evidence like check images or bank records.
Consider signing up for a credit monitoring service to make watching your credit scores simpler. MyScoreIQ services can provide you with regular copies of your credit report and FICO® Scores along with alerts when changes occur