First off, it's important to understand that if an original creditor has assigned or sold your debt to a collection agency then it can no longer deal with you, and it will most likely have already deducted your bad debt from its gross income when figuring its taxable income. Secondly, and before going any further, we need to understand what is meant by the term, Collection Agency, and it is in essence one of these three things: 1) A company that has been assigned a debt, for collection. 2) A company that has purchased a debt, for collection. 3) A lawyer who has been hired to collect a debt. And the third most important think to be clear about, is which kind of debts can you settle and they are things like: a) medical bills, b) credit cards, c) personal loans, d) department store cards, e) student loans, f) bounced checks. What all the above have in common is that they are all unsecured debts, which means that the amount owing can be negotiated, whereas an auto loan or a mortgage are secured debts and the lender has no reason to negotiate, since it has the right to repossess them. Assuming that the person that contacted you is a debt collector, that he or she represents a Collection Agency, and that the debt is an unsecured one, we will now look at two more things that must be verified before you even think of settling the debt. The debt first needs to be validated, which means making sure that the person or company requesting payment has been authorized to collect the debt, and is in fact who they say they are, and if you do a quick search for Debt Validation, you'll find many good articles on the subject. The next thing to do is to establish whether the debt is outside of the statute of limitations or not, and if it's outside them, then you are quite within your rights to tell the debt collector to stop pestering you. Don't Be Confused Just because a debt has been removed from your credit report, doesn't mean that you don't owe the money, and there is often some confusion about this. In almost every case, a bad debt and all related comments must by law be removed from your credit report after seven years, and if it's still there then contact the credit agency and they will remove it. This law applies to credit agencies though, and should not be confused with the statute of limitations on debts, so be sure to check the laws for your state very carefully. Some Important Dos And Don'ts 1) Try to handle all correspondence by mail so there's a paper trail, and use registered mail, receipt requested, and make sure you keep a copy. 2) If you do have to speak on the phone, then make a note of the date and time, the person that you spoke to, and what was discussed. 3) Always believe that the agency will accept less than they say they will. 4) Stay calm and remind yourself that the collection agency wants to strike a deal and that time is on your side, and never forget that the more time that passes, the less you'll have to pay. 5) Never ever say that you need to settle the debt. 6) Never agree to their first or even second offer. 7) If they really press hard, then threaten them with bankruptcy, and if they believe you, then they'll always settle quickly, and for less. 8) A debt collection agency does have the right to take you to court, but it's a long process which costs money and doesn't guarantee results, so it's the last thing that the agency will want to do, so keep your cool. So How Much Should You Offer? The agency most likely paid between five and seven cents on the dollar if the debt is a recent one, and as little two cents if the debt is an old one, and if it's very old, and we're talking several years, then the debt might have been bought for as little as one cent on the dollar. To keep the arithmetic relatively simple, let's look at a debt of $2,000 and note that if it's a recent one that the agency most likely paid around $120 (6 percent) for it, and for an older one then maybe as little as $20 (1 percent), so I'd recommend offering them 20% of the original amount for starters which comes to $400 for a fairly recent debt, and $250 for an old debt and although you'll most likely have to up the figure by around 5%, you'll be very much in the ball park. If you're contacted by a second debt collection agency, then be sure that they have the right to collect the debt, and if they do then you can pretty safely assume that they paid even less for the debt than the first agency, so offer them even less. Be Very Wary Of Penalties And Padding It's very common for debt collection agencies to add on huge amounts of interest based on the original debt, and that's called usury, and it's illegal in every state, so remember that the agency bought the debt for a few cents on the dollar, and that's what they can charge you interest on.
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