Personal Finance Advice

You may have heard about the concept of settling your debt with a collection agency, where the agency agrees to take less money for the debt and call it even.  Why would they do this? Simply put, they probably don’t think they’re going to get the full balance that you owe plus all the fees that have been tacked on, so they might as well accept a smaller amount because it’s better than nothing.

Besides, most collection agencies that purchase debt from lenders purchase it at a fraction of the actual amount owed, so a settlement might still result in a profit for the collector.

The most important thing you can learn about debt settlement is this: You don’t have to pay someone else to do it for you.  If you have a debt in collections then you can propose a settlement yourself, although if you wait long enough there is a good chance that a settlement will be offered to you by the collector.

If you’re going to propose a debt settlement, make sure you do these things:

1.  Don’t offer an amount of money that you don’t actually have.  If you offer the collector a settlement of $2400 then you better have access to $2400.  In other words, don’t offer money that you don’t actually have.

2.  Don’t expect the collector to accept a ridiculous offer.  Don’t think that collectors are so desperate that they will accept $800 for a $12,000 debt.  You have to be reasonable.

3.  Get the deal in writing before paying.  If you don’t get the agreement in writing before you pay then it might wind up simply getting applied to your balance and nothing will be settled.

4.  Make good on your settlement.  Don’t agree to pay a certain amount and then not pay it.  You will find that the collector will not be nearly as willing to negotiate a second time around if you don’t honor the agreement.

You should also know that even though the debt is considered “paid” by the collector and you won’t get contacted for any further payments on the debt, your credit report will probably reflect the fact that you wound up settling the debt for less than you owed.  Make no mistake about it…this is far better than simply ignoring the debt.  Until the account falls off your credit report, however, this item will drag your score down.

When should you settle a debt? If there is no way that you will be able to pay off the entire amount you owe, or if you have a lump sum that you would like to apply to the debt, you may want to suggest a settlement.  It’s easy enough to do.  Simply say something to your collector like this:

“I owe you $5000, but I have $2900 sitting in my savings account right now.  Can I settle the debt for this amount?”

There is a pretty good chance that the collector will accept your suggested terms as long as you aren’t offering an absurdly low amount.

Don’t let this become a financial habit.  It’s one thing to settle a debt that won’t get paid otherwise, but it’s another thing to settle all your debts because you simply don’t want to pay the full amount.  That’s a surefire way to ruin your credit.