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Once a debt has been sent to collections, the original creditor writes off the debt and takes an accounting loss. The collection agency earns between 25% and 60% of what it is able to collect but, in order to earn, the agency must collect something. There exists a strong incentive for the collection agency to settle the debt for what it can now and move on. This little known fact opens the door to negotiating with an agency attempting to collect a debt.

While the agency has strong motivation to collect 100% of the debt owed, they will consider almost any reasonable offer. Remember, it is in their best interest to collect something now in order to get paid rather than risk being paid nothing and having the account pulled by the creditor and sent to another agency. Make the offer sweet enough and the agency will settle with you.

Let’s say you owe $750 and you are able to pay half of the amount, or $375, today. Don’t offer the whole amount you are willing to pay simply because if the agent you are dealing with smells a deal they will assume that you are able to pay more than you say you can pay. It is, therefore, to your advantage to offer less than the top figure you are willing to pay. So offer between 60% and 75% of your top dollar figure. In this case you should offer something between $275 and $281. I suggest that you don’t end your initial offer in an increment of $5. Offering $280 or $295 sounds like a best guess at what you are able to pay. Offering $277 or $277 leaves the impression that you have given some thought to what you can actually afford to pay now. By using precise dollar amounts in your offer you are more likely to get a lower counter offer from the agent. But you will get a counter offer–you can go to the bank on that.

Never let the agency know the source of your money. Don’t tell them that you are getting help from your parents, that you have a friend that is willing to help, or that you have just won the lotto. If the agent even smells an external source of funds you are less likely to settle the debt and they will press for the full amount. So don’t tell them anything they do not need to know, they don’t ask, and always try to answer their questions with concise answers.

Once you have reached an agreement over the phone you must send a confirming letter to the agency. The letter should include the following information:

The creditor has agreed to accept the negotiated lump-sum payment as payment in full for the entire amount owed.
That cashing the enclosed check in the amount of $327, when cashed, is explicit acknowledgment of payment in full on this account.
Include the account reference numbers, both the creditor’s numbers and the agency’s numbers.

On the check itself write something like the following in the endorsement space on the back of the check:

This instrument is payment in full of any debt owed by me to the XYZ Corporation pursuant to our agreement of August 23, 2007. Depositing this check represents payment in full for my outstanding debt.

Make payment by cashiers check or money order in order to protect your bank account number from the collection agency. Never pay in cash. Do not pay the original creditor unless the agency instructs you to do so in writing. Keep all paperwork for at least 4 years but no more than 7 years.

So there you have it. You can negotiate with collection agencies but never agree to pay more than you can afford to pay today. Protect yourself by keeping records of all paperwork. You are creating a win-win situation for the collection agency and getting an obligation off your plate.

Roger Passman is the President of WDC Financial Services, Inc. His firm works with clients to restore damaged credit, negotiate payment plans, and reduce debt. You can visit WDC Financial Services at http://www.WDCFinancialServices.com

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