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Settle debt with collection agencies for pennies on the dollar

Once a debt is sold to a collection agency you have a chance to settle the debt for a lesser amount, often pennies on the dollar.
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Settle debts for pennies on the dollar. Before you pay one dime to a collection agency, try negotiating a better deal. Everything is negotiable.

Never allow a collection agency to tell you anything different. By offering a lump-sum payment, you could easily cut your debt in half, or more!

Even if you’re unable to offer a lump-sum payment, you can still insist on a reduced debt amount with monthly payments.

Debt collectors purchase consumer debt for pennies on the dollar from an original creditor. For example, let’s say you have unpaid credit card debt with Chase (the original creditor), it can go through the following process:

  • Once the unpaid debt is charged off, it may be sold to a debt buyer.
  • The debt buyer purchases 1000s of unpaid accounts from Chase for pennies on the dollar.
  • The debt buyer then attempts to collect the full amount of the debt from you.
  • There is a ton of potential for profit to be made by the debt collector if they can get you to pay in full. This is perfectly legal.
  • But why shouldn’t you negotiate a better deal since the debt buyer paid a few cents on the dollar for the account?

If you are planning to pay a debt collector, here are several reasons to negotiate a better deal:

Debt buyers purchase debts for pennies on the dollar

How much a debt buyer pays for an account depends a lot on the age and type of debt. The average debt collector pays a creditor between 4% and 10% of the original debt amount to purchase a charged-off debt. In fact, Minnesota Attorney General Keith Ellison stated “It is not uncommon for a debt buyer to pay less than five cents per dollar owed.

The amount that a debt collector pays can vary depending on a number of factors:

  • Age of the Debt. The older a debt is, the less it may be worth to a debt collection agency. Older debts are often sold for lower amounts because they become more challenging to collect as time goes on.
  • Type of Debt. Different types of debts may have different purchase prices. For example, credit card debt, which is typically unsecured, might be sold for a lower percentage of the total amount owed compared to secured debts like auto loans or mortgages.
  • Creditworthiness of the debtor. Debt collectors assess the likelihood of collecting on a debt before purchasing it. If they believe a debt has a higher chance of being collected, they may be willing to pay more for it.
  • Market Conditions. Market conditions and the demand for certain types of debt can affect purchase prices. In times of economic instability or recession, for example, debt collection agencies might be more conservative in their purchases.
  • Creditor Agreements. Creditors and debt collection agencies may have specific agreements that dictate the purchase price and terms for buying charged-off debts. These agreements can vary from creditor to creditor.
  • The volume of debts being purchased.
  • Creditors often sell portfolios of charged-off debts in bulk, and the overall purchase price for the portfolio may be influenced by various factors, including the total debt value and the volume of debts included. Given the variations in these factors, it’s challenging to provide an average purchase price that debt collectors pay for charged-off debts. The purchase price is usually negotiated between the creditor and the debt collection agency or buyer.

Rarely is there any occasion for you to pay the full dollar amount requested by a collection agency that has purchased the debt.

Before you pay, check the Statute of Limitations

Every state has a statute of limitations on debt. Once the statute of limitations has passed, you can no longer be sued for the debt. A debt collector can continue to attempt collection, however, there is no legal recourse they can pursue.

Without the threat of legal action, you can negotiate with confidence but more importantly, you can consider leaving the debt unpaid (debt collectors hope you don’t know this). The ball is in your court.

Most debt collectors just want to get paid

Offering a single lump-sum payment is a great way to go. Debt collectors want your money as soon as possible, and they may be willing to settle for less if you agree to one big payment. Some debt collectors will offer to settle if you pay 40 to 60 percent of the amount due. But it’s a good practice to start very low, for example, offer no more than .25 cents on the dollar.

Think about it, if a collection agency recently purchased your debt for .05 cents on the dollar and you offer .25 cents on the dollar to settle the debt, they’ve made money.

You may have experienced some debt collectors that include a settlement offer of a 50% discount in their first communication with you. If they can offer 50% off in their initial dealings, then rest assured offering .25 cents on the dollar or less is reasonable.

Keep in mind the debt collector has added additional interest and fees to the debt. Even at a low offer, the collection agency will still make a profit from the debt.

Negotiate the entire debt

During your negotiations, you want to make sure you negotiate the entire balance in full.


Some debt collectors will settle for less than turn around and hire another debt collector to collect the difference; or worse, sell the remainder of the debt to another debt collector. This is illegal in some states. You may want to check with your State’s Attorney General in order to confirm whether a collection agency can settle, then have another collection agency go after the balance.

Avoid sending the collection agency any money until you get a faxed or scanned letter saying they’ll accept your payment and that the payoff will absolve you of any future legal obligation for that debt.

The older the debt, the lower your settlement offer. The debt may be on its second or even third round of debt collectors. This is good news for settling debt for pennies on the dollar. Now you know for sure the second or third debt collector has paid even less for the debt.

Be prepared for an IRS 1099C Notice

After settling debt for less, consumers may be blindsided by receiving a 1099-C “Cancellation of Debt” tax notice. The IRS considers forgiven or canceled debt as income.

Debt collectors that agree to accept at least $600 less than the original balance are required by law to file 1099-C forms with the IRS and to send debtors notices as well. Not all debt collectors will send an IRS 1099C Notice. The debt collector may not be able to prove you owe the debt since the account may have been transferred multiple times from debt collector to debt collector. Junk debt buyers may choose to avoid sending you a 1099C notice.

It is best to inquire before you send a settlement payment. If you receive a 1099C notice make sure you consult your tax preparer.

Secured debt typically cannot be negotiated

Secured debt such as your home or automobile makes it a lot harder to negotiate a lesser settlement. As a rule, you can only settle unsecured debt.

Secured debt has real property collateral attached to it and if you cannot make payments the creditor can simply repossess or foreclose to cover the debt.

With unsecured debts, there is nothing “attached” to the extension of credit to be used as repayment in case of default.

Negotiate a deletion from credit reports

Settled collection accounts will most likely do nothing to improve your credit scores. If you can get the debt removed from your credit file in exchange for payment, even payment in full, it may be worth it to you in order to get the derogatory account deleted. The reason settling a derogatory account almost never has a positive impact on credit scores is because current FICO credit scoring models are built to predict the likelihood of whether a consumer will miss payments in the future.

Settling an account does not erase the fact that the default occurred and, therefore, usually does nothing to raise a consumer’s credit scores. A settled negative account remains a negative part of your credit report.

Once the current version, FICO9, is implemented by more creditors, the scoring formula will ignore all collection accounts that have a zero balance, regardless of whether it was paid or settled. Unfortunately, most lenders and credit card companies are still using FICO 8 version which does not differentiate between paid and unpaid collection accounts.

If you cannot get a full deletion, then at the very least, request the settled account be updated to “Paid as Agreed” or “Paid/Settled”. Many banks won’t approve your credit card or loan application as long as you have outstanding collection accounts on your credit reports.

There may even be employers who won’t hire you for certain jobs if you have unpaid debts on your credit report. A $0 balance is going to look far better than one that’s still delinquent.

Negotiations and Agreements should be in writing

Put all your negotiations in writing. Make sure the correspondence includes the words “full payment on the debt” and “complete discharge of all monies due.”

Keep excellent records when negotiating with a collection agency and always mail the correspondence certified, return receipt mail. Make sure you negotiate a pay for deletion. You may as well get the most for your money.

Why not get the negative account deleted from your credit reports if you are willing to settle a debt. But keep in mind, the debt collector may request you pay the full amount if you want a deletion.

Hold your ground. Offer a settlement for pennies on the dollars along with a pay for deletion agreement. Go for it!

Keep your financial information private

Never let the collection agency know where the money is coming from. First, it’s none of their business, but more importantly, if you mention you are getting a settlement, tax return, or borrowing money from relatives, they may be unwilling to accept a lesser amount and press you for the entire debt.

If you are negotiating over the phone (why are you negotiating over the phone?) make sure you take excellent notes and send a confirming letter, certified, return receipt and keep a copy for your records. The letter should state that the collection agency is accepting the lump-sum payment in settlement of the entire amount you owe. Do not give a collection agency your bank account or debit card number.

Pay off the settlement with a cashier’s check or money order, preferably from another bank. The U.S. Postal Service sells money orders. Be sure to keep a copy of the cashier’s check or money order.

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