Debt settlement is the process of negotiating with your debtor to settle your debt for a lower amount than you owe. Many collection companies purchase bad debt for pennies on the dollar and are open to settling for a lower amount. However, the process of negotiating can be tough, and people frequently make mistakes that cost them money. While it’s generally better to avoid these costly errors by having a professional negotiate on your behalf, here are some important tips to help you settle your debt yourself.
Understand Your Rights
As anyone who has been in debt collection knows, collection agency representatives can be aggressive and difficult to deal with. It’s important to stay calm, understand your rights, and protect yourself. When a collection agency contacts you, always remember:
- Verify that you owe the debt. This may seem like a no-brainer, but many people are sent to collections for debts that they don’t actually owe. If a collection agency contacts you, immediately request that they send you proof of the debt. They have 30 days to send you written proof of the debt, and cannot attempt to collect it during that time. If you feel that you don’t owe this debt, contact the original debtor to resolve it, and make sure they contact the collection agency on your behalf.
Important: You can download these Word documents to use during verification. Unfair Collection Practices and Verification-Validation of Debt.
- Know Your Statute of Limitations. Collection agencies have a limited amount of time in which to collect the debt or sue you in court. In other words, they cannot simply call and harass you forever. Every state has a different statute of limitations, so look up the statute of limitations in your state. Keep in mind that the statute of limitations only applies to collection activity, and the debt will still affect your credit score even if no one is attempting to collect it. If you have an old debt, you may choose to ignore it and let it remain on your credit report, pay it all at once, or make a payment arrangement. If a debt collector contacts you about a debt that exceeds the statute of limitations, you can contact the Federal Trade Commission and your state’s Attorney General and demand that collection activity cease.
- Know about the Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act (FCDPA) is a US federal law that prohibits collection agencies from harassing, abusing, or threatening you. It limits the hours in which a collection agency can contact you, forbids them from contacting you at your place of employment if asked to stop, prohibits collection agencies from deceiving you about the amount owed, and bars them from using tactics intended to embarrass you. If a debt collector is breaking the law in their communications with you, you can contact the Federal Trade Commission, the Consumer Financial Protection Bureau, and your state’s Attorney General to protect your rights. You may even be able to sue a debt collector for violating your rights.
Know the Risks
When you pick up the phone to contact a collection agency, you run the risk of making your debt situation worse, not better. Be careful to avoid these mistakes:
- Restarting the clock on the statute of limitations. If a debt collector contacts you about a debt that is older than the statute of limitations, be aware that things that you say may “restart the clock.” In many states, if you verbally agree on the phone to a payment arrangement, it revives the debt and the statute of limitations starts over.
- Disclosing information that can be used against you. If you share information with a collection agency about your employment, income, spending, or anything else, they may use that information to attempt to collect the debt. It is best to answer only strictly necessary questions, and volunteer as little information as possible. It’s even better to communicate with them only in writing, by registered mail, so that you have a written record of all communications.
Get a Handle on Your Debt
Before you pick up the phone, do a thorough evaluation of your debts and your income. Prioritize which debts are the most important, and determine how much you can realistically afford to pay. Correctly prioritizing your debts can minimize the negative effects, so prioritize debts that have the highest interest rate first, or the ones that are having the worst effect on your credit score.
Understand Unsecured Debt Collection
Before you contact the collection company, it’s good to know how the business operates. Collection agencies purchase debt, often for pennies on the dollar. For example, if you owe $100, the collection agency may have “bought” that debt for $25. Therefore, a settlement of $50 is a good deal for them. And every time they call you, write you, or contact you, it costs them money. Negotiating a one-time settlement is a good business practice, but they will still attempt to get as much money out of you as they can.
How to Negotiate a Debt Settlement:
- Offer a Lump Sum. If possible, a single cash payment is preferable to ongoing payments, which linger longer on your credit report and extend the statute of limitations. If you can, you want to pay a single amount to put an end to the debt.
- Include all your desired terms. Don’t just offer to pay a sum and end collection: make sure that you also stipulate that the debt be removed from your credit report, and that it be reported as “paid in full.”
- Be prepared to haggle. As with all negotiations, offer less than you are willing to ultimately pay, so that there is room for negotiating. Try offering 30% of the total debt, but be prepared to go as high as 60%. Do not budge from your final offer. Speak with a supervisor if necessary.
- Get it in writing. Before you actually pay the amount, get a written statement that includes the amount of the final payment, an agreement that this satisfies the debt in full, and agreement to report it positively to the credit bureaus. Keep detailed notes and, again, speak with a supervisor if necessary.
Done well, negotiating a settlement can clear your debts for much less than you actually owe, but it can require patience, persistence, and tough negotiating. Done poorly, you may accidentally lose the benefit of the statute of limitations, disclose information that further exacerbates collection activity, or end up paying too much money.
Given these risks, and how hard it can be to reach an agreement, it’s often better to leave it to professionals. When a professional negotiates on your behalf, you don’t have to deal with the agency’s collection tactics, don’t accidentally disclose information, and don’t pay more than you need to. It also saves a lot of time and stress. The team at DebtBlue are experts at negotiating debt settlements and know exactly how to save you as much money as possible while clearing your debts and improving your credit. Get in touch with DebtBlue to find out exactly how much money you can save on debt settlements.