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Whether you suffer a financial setback or there's not enough room in your budget to cover all of your bills, falling behind on your payments could result in a debt collector taking over your account.
If a debt collector contacts you, don't ignore it because you are still responsible for your debts. But you don't necessarily have to pay it on the spot, especially if you don't agree with the debt or debt amount. You should also take steps to verify a debt collector's legitimacy and to dispute inaccurate debt collection attempts.
You can negotiate with debt collectors, but it's important to first understand your rights and limitations. Here's what you need to know about negotiating with debt collectors.
What to Do When a Debt Collector Contacts You
While there are many reputable debt collection companies, the industry also has its fair share of less-than-credible actors committing scams. That's why it's essential to verify the person contacting you has legitimate cause to collect the debt. Here's how to verify a collector has the authority to collect any debt from you:
- Ask the collector for the collection company's name, contact information and the collector's professional license number if your state requires them.
- Contact your creditor to confirm your account fell into collections and get the name of the debt collection agency that acquired your account.
- Search the National Multistate Licensing System (NMLS) Consumer Access using your debt collector's name and license number to verify their legitimacy.
To confirm the status and amount of the debt, ask your creditor to send you a debt validation notice. The Fair Debt Collection Practices Act mandates debt collectors to give you specific account details—such as your creditor's name and the amount due—when they first contact you or within five days of that date. Once you receive your notice, you have 30 days to dispute the amount due or to request further information.
After you verify the debt, start preparing to satisfy your debt. If you can afford it, you may pay it in full. If that's not an option, review your income and expenses to see how much you can comfortably pay. Agreeing to payment terms beyond your financial ability could make it challenging to pay your other bills, which could result in you falling into collections with one or more of your other accounts.
Understanding your budget can help you identify the best option, such as:
- Negotiating a smaller debt amount: If you're financially unable to pay the full balance, you may be able to negotiate with the collector to accept a lower amount than the original balance.
- Making smaller payments: If your budget doesn't allow you to make your original payment amount, propose a more extended repayment plan with smaller monthly payments.
- Making a lump-sum payment: If you want to pay off your debt faster, offer to make larger payments for a short period or make one lump-sum payment.
Of course, you'll want to get any agreement you make in writing before making a payment.
How to Negotiate a Past-Due Debt
Generally, you'll negotiate your debt with the collector rather than your creditor. They've already purchased the debt from your creditor and are responsible for collecting it. Remember, debt collectors typically purchase past-due debt from your creditor for pennies on the dollar. Consequently, these collectors may not necessarily expect to collect the total amount you owe, giving you an inroad to negotiate the debt down.
As a reference, the American Fair Credit Council states the average settlement amount is 48% of the balance owed. Of course, the terms of any agreement you reach with the debt collection agency will depend on your negotiation skills and the collector's willingness to negotiate. Remember, not all debt collectors are willing to accept less than the full debt.
Offer to Pay an Amount You Can Afford
If you want to pay less than the total debt amount, offering a lump-sum payment may be your best bet for a successful negotiation. That's because collectors are more likely to settle if you can make one large payment to pay off your debt. So if your debt is $800 and you offer to pay $500, the collector may agree to take your payment, recoup their investment, keep the rest as profit and close its books on the matter.
Keep in mind that negotiating parameters vary from one debt collection company to another. While one agency may accept one-third of what you owe, another one may require 75% of your full debt amount.
Before you suggest a lump-sum amount, determine the maximum amount you can afford and don't budge. Start with a low offer, such as 25% of the debt you owe, and work toward a middle ground. Of course, the debt collector will try to get you to pay more, but you shouldn't pay more than your maximum limit; otherwise, you could end up paying more than you can afford and risk further debt trouble.
Consider Setting Up a Payment Schedule
If your negotiator isn't willing to negotiate on a lump-sum amount, your best option may be to explain your situation to the debt collector and try to agree on an affordable payment schedule. You may be able to enroll in a debt settlement program whereby you negotiate a lower debt balance and agree to make monthly payments for a period ranging from 12 to 48 months.
Generally, paying your entire balance on a collection account will affect your credit score less than if you pay a lower amount. The latter option will result in a "settled" payment status on your credit report, which could negatively affect your credit score. Still, even a paid collection account will remain on your credit report for seven years from your first missed payment date.
Is Negotiation Always the Right Move?
While debt negotiation may allow you to pay you less than what you owe, paying your debt in full is a better move if you can afford it. Your credit report won't show a "settled" status, and you won't have to deal with debt collectors or spend time researching your rights and responsibilities. Additionally, you can enjoy the personal satisfaction and pride of meeting your financial obligations.
The Consumer Financial Protection Bureau (CFPB) recommends talking to a lawyer to discuss your state's statute of limitations before you pay for a past-due debt in collections. The statute of limitations is the time, typically ranging from three to six years, when you can be sued to recover past debts. A debt collector may have more incentive to negotiate better terms if your debt is approaching the statute of limitations expiration.
The Bottom Line
If you're getting calls from a debt collection company, resist the temptation to ignore them and face the problem head on. Verify the debt collector and that the debt is legitimate and dispute the collection if it isn't. If you do owe the debt, it's best to pay it off in full instead of negotiating a settlement.
One way to avoid collections is to create a simple budget to ensure your money is going toward all of your current bills. Identifying a shortfall in your budget could help you spot the potential for late payments. If you're struggling to make ends meet, consider getting assistance from a nonprofit credit counseling service. Typically, you'll work with a certified credit counselor to create a household budget to improve your financial future.
