5 Expert Tips on Negotiating with Debt Collectors

For the average person, attempting to negotiate with a debt collector can be perhaps one of the most intimidating and unpleasant experiences ever. If you are trying to negotiate with a debt collector on your own, here are five important tips to help. Keep these in mind before you ever pick up the phone to try to settle an outstanding debt or collection account.

Tip #1: Make Sure the Debt Is Legitimate

Collection scams are quite common. Just because someone calls you on the phone regarding a debt, even if the caller claims to work for a creditor you do in fact recognize, you should always proceed with extreme caution.

First, verify that the debt actually appears on your credit reports and also ask the collection agency to send you a written validation of the debt. (The law requires them to provide this information to you when you request it.)

If the debt does not appear on your credit reports and if the collector is unwilling to provide you with a debt validation, giving out any of your personal or payment information might be risky.

Tip #2: Paying Less Than You Owe Is Fine

When a defaulted account is purchased by a debt collector, the collection agency normally only pays a fraction of the actual amount you owe to buy the debt. In fact, the collection agency probably only paid pennies on the dollar to purchase your outstanding account.

If you owed your original creditor $2,000, a debt collector might have purchased the account for just $20 – $60. Therefore, if you turn around and settle the account with the debt collector for even just 30% of what was owed ($600), the collection agency actually makes a nice profit on the settlement.

Additionally, a settlement in full will typically earn you a $0 balance on your credit reports. Whether you pay the full amount or whether you negotiate to settle the debt at a lower price, you should still achieve basically the same result on your credit reports.

Note: A settlement may be viewed negatively by credit scoring models. Yet since a collection is already a derogatory mark on your credit, the inclusion of a settlement notation probably will not have any additional negative impact upon your credit scores.

Tip #3: Beware of Awakening the Dead

Based upon the state where you lived when the debt was originally incurred, your debt collector will only have a finite amount of time to sue you for an unpaid debt. Each state has a different statute of limitations before a debt will become time barred.

Once a debt is time barred, you can no longer be sued by a creditor or debt collector for your unpaid debt. However, there are mistakes you can make which could possibly restart the clock on your debt’s statute of limitations.

For example, if you set up a payment arrangement with a debt collector instead of negotiating to pay the debt in a single lump sum settlement, as soon as you make your first payment you risk restarting the clock on the debt. One partial payment could potentially make it fair game again for a debt collector to sue you for the remaining balance.

Tip #4: Ask for the Deletion

Unfortunately, paying or settling a collection account is not going to automatically remove the account from your credit reports. The Fair Credit Reporting Act (FCRA) allows collection accounts to remain on your credit reports for seven years from the date of default on the original account. Whether you pay or ignore the debt, the seven year credit reporting clock remains the same.

One way to see an account removed from your credit reports early is to ask the collection agency to voluntarily delete the account from your credit reports now, after the account has been paid or settled, of course. (If you are successful, remember to get the offer in writing.) Unfortunately, securing a pay-for-delete deal is often difficult, if not downright impossible, to negotiate.

Collection agencies sign agreements with the credit reporting agencies—Equifax, TransUnion, and Experian—stating that they will not delete collection accounts from your credit reports early simply because they have been paid. Removing a paid or settled collection account early is not illegal (that is a myth); however, it could land the collection agency in a lot of hot water with the credit reporting agencies.

Scoring a pay-for-delete agreement with a creditor or debt collector is absolutely a long shot. On the other hand, it never hurts to ask.

Tip #5 Managing Your Expectations

As mentioned above, paying a collection account after the fact is not going to erase the item from your credit reports unless you were lucky enough to secure a pay-for-delete settlement. If a paid collection account remains on your credit reports, the mere fact that the balance has been updated to $0 is probably not going to have much of a positive impact (if any) upon your credit scores.

In fact, sometimes paying off an old collection account can even temporarily drop your credit scores. The reason this can occur is because some lenders use older versions of credit scoring models. These older scoring models have deficiencies which may interpret payments on a derogatory account as new collection activity. (Crazy, right!?)

The FICO credit scoring models which are currently in use by many lenders will still count collection accounts against you whether they are paid or unpaid. Under these scoring models, a collection account with a $1,000 balance and a collection account with a $0 balance are likely to have roughly the same negative impact upon your credit scores.

Paying a collection does not undo the fact that the collection occurred in the first place. Unfortunately, the fact that the collection occurred, not the balance, is what matters to many credit scoring models and lenders alike. As a result, you should not expect your credit scores to shoot through the roof just because you settle out an old, negative debt.

Your Next Steps

If your financial situation has improved and you can finally afford to pay your old debt, then doing so may be a good idea. After all if you owe a legitimate debt, the right thing to do is probably to honor your financial commitment, even if doing so may not improve your credit scores. In the meantime, consider taking some other steps to rebuild your credit for the future.