By the time a debt goes to a debt collector, it’s usually become so delinquent that the original creditor has given up hope of collecting it. This is often the best opportunity to settle a debt.
The Economics of Buying Debt
Debt collectors often purchase debts from creditors, lenders, and other businesses for a fraction of the debt amount. For example, if you had a debt of $1,000, chances are the debt collector purchased it for something like $10 to $100. The older the debt is, the less money the debt collector has likely paid for it.
Even though debt collectors have purchased the debt for less, they’re still allowed to collect the face value of the debt. However, since they’ve bought it for less, they will often accept payment that’s less than the face value of the debt because anything more than what they’ve paid is profit. For example, if the debt collector paid $100 for your $1,000, you may be able to settle it for $200 to $400. That’s still considerably less than the original $1,000. You pay less, the collector gets a profit and everyone is happy.
Now, you can understand why many debt settlement companies promise to settle your debts for 10% to 60% of the original debt amount.
Settling With Debt Collectors
Negotiating a debt settlement with a debt collector isn’t always simple. Even if the collector paid just a little for your debt, they would like to collect the full amount. So that’s what they push for in the beginning.
Make an offer. A debt settlement offer of 25% is usually a good starting place. That means, you’ll be offering to pay $125 on a $500 debt or $250 on a $1,000 debt.
Phone or mail? Many people will tell you not to negotiate with debt collectors over the phone, that you should only communicate with them via mail, since collectors often gain the upper hand in phone conversations and could lead to something detrimental. For instance, you could say something that would toll the statute of limitations, which is the time limit creditors have for suing over debts.
However, you may be able to get a debt settled faster over the phone. Be firm about your settlement offer and don’t increase it if you can’t afford to. Specifically, don’t get talked into making a full payment or making payments on the debt.
When you reach a settlement, be prepared to make the full settled payment. But before you pay, get a signed copy of the settlement agreement from the debt collector. This part can usually be done via fax or mail. Do not make payment without getting a signed agreement from the collector.
Because debt settlement negotiations are usually more effective when you can afford to pay the full settlement amount immediately, it’s better to wait until you have all the money for the settlement before you make an offer. That may mean making monthly deposits into a special savings account and doing your settlement negotiations when the account has reached a certain balance.
Once you’ve successfully settled one debt, it could help build momentum to settle another and another until you’ve settled all your debts.