Below is an excerpt from our Debt Free Forever Guide. Be sure to download the free guide to help dump debt for good.
It is important to understand how collection agencies work, and then you can understand how to negotiate with them.
Debt collection agencies, for the most past, are tiny compared to the big banks you were dealing with previously. Some of them are incredibly tiny, and you have to be careful. Although this is not the case with all of them, many debt collection agencies are extremely liberal with the law and will try to scare you and manipulate you into paying.
What to Know About Collection Agencies
- Debt collection agencies buy debt for pennies on the dollar. Imagine you have $100 of debt with Citibank. They try for 6 months to collect the debt. At month 6, they write off the debt (take a loss) and then sell the debt to a collection agency. The agency will likely only pay $1 to $2 for the debt. So, you may have originally owed Citibank $100, but the debt collection agency only paid $1 or $2 to get that contract. Although they have the legal right to collect the full $100, they are happy even if they collect much less. If they pay $1 for the debt, and then collect $2, they have doubled their money.
- Be careful giving your account information to a debt collection agency. They are famous for trying as often as possible to get money out of any account where they have account information. Even if you don’t authorize them, it can get very difficult to prove. It becomes your word versus their word. So there are specific ways that you should make a payment to a debt collection agency, which we describe in more detail below. So, now you know that the debt collection agency only paid pennies on the dollar. With that information, you can negotiate hard for a settlement.
What to Know When Negotiating
- After 7 years (from going to the collection agency), the debt will no longer impact your credit score. They will still have the legal right to collect, but the statute of limitations will limit their ability to sue or garnish wages. So, if you are close to 7 years, you may not want to pay. You may just want to wait.
- Negotiate hard on the phone. They will try to threaten you (and they are good at it). Tell them that you know your rights, and that you are not afraid to go to the CFPB if they don’t respect your rights and protections. You should be able to settle for at least 50% of the face value. You may even get a better deal. (For example, if you owed $5,000 than you can offer $2,500).
What To Do When You Reach an Agreement
- You do not make any payment until you get confirmation of the settlement terms in writing
- The debt collection agency writes that, upon payment of the settlement, the debt will be considered closed. They need to make it clear that this is a full and final settlement, and no further collection activity will take place. Warning: the forgiven debt may be subject to income tax. For example, in this case, the $2,500 that is forgiven will be taxable.
- You should ask the debt collection agency to delete the collection item from the credit bureau. They may or may not do this – but it is certainly worth asking.
- Once you agree the settlement amount, open a separate account to make the payment.
Remember: you never want to give the collection agency access to your core checking account. We recommend going to WalMart and opening a Bluebird. It is free, and comes with checks and online billpay. Only put into the account the amount that you agreed for the settlement, and then make the payment. You can close the account once the account is settled and complete.
Make sure you keep a paper trail of your settlement. If something goes wrong in the future, it is your PAPER against theirs.
If the collection agency tries to play dirty, or if another collection agency calls and tries to get money out of you, make sure you DO NOT AFFIRM THE DEBT. Tell them that you do not recognize the debt. You can then complain to the CFPB.
Disputing Collection Items That Aren’t Yours
If you see a collection item on your credit report that does not belong to you, it is easy to have it removed. You just need to protest online, at each of the 3 credit reporting agencies. You can dispute those records here:
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