How to Settle Collection Accounts for Less Than The Original Balance

Do you want to settle a past due account for less than you originally owed? It is possible, but there are specific steps you need to follow to come out on top.

One of our readers recently wrote in to us with a similar situation. We’ll take a look at her question and give some clear advice on how to settle collection accounts the right way.

I have a past due AMEX credit card that is currently in collections. The collection agency has sent letters saying they will settle for much less of my original balance…what kind of payments would they accept…they are settling for about 27000…if i told them i would make payments am i still in jeopardy of getting sued? What can i say to them to try and get a lower balance? E.

When trying to determine what to do with accounts that are in collections we have to figure out how exactly collection agencies operate. Some say to never, ever make payments to a collection agency and to pay them off completely in one shot. Obviously, that isn’t always possible and you have to make payments, but having an understanding of collection agencies and how they work will insure that you take the necessary steps in protecting your financial health.

Without knowing what kind of balance you owe American Express, I’m going to guess it may be large if the collection agency is willing to settle for $27,000. However, the negotiations should probably not stop there, even if you are able to pay that amount. Collection agencies typically buy accounts from the original creditor (in this example, American Express) for pennies on the dollar.

Debts that have been recently charged off by the creditor are usually purchased at 6 to 7 cents to the dollar; while older debts may be purchased for as low as 1.5 to 2 cents on the dollar.

There is a statute of limitations on when the debt can be collected based on the state you live in, which is normally around 7 years. If the debt has passed the statute of limitations, the collection agency cannot sue you. Still, these accounts are purchased by collection agencies for as little as a penny or less on the dollar.

This means that if your original debt with AMEX was at least $30,000 and was recently charged off, the collection agency probably paid at the most $2,100. This is just an estimate based on whether the amount you owe to AMEX is around $30,000. It still gives you an idea of how little the collection agency is expecting to receive for the debt. If they have in fact paid $2,100 for the account, there is a good chance that they would receive as low as $5,000 to settle. When you think about it, if they accept a $5,000 settlement, the collection agency earns a profit of $2,900.

The point is that you have a good chance of negotiating a lower settlement payment with the collection agency. Keep in mind that you are no longer dealing with American Express at this point so it basically makes no difference to AMEX what you settle on. For one reason or another, they have turned your account to collections and don’t expect to receive anything from it.

Can the collection agency sue you after you have paid?

One of the rules of dealing with a collection agency is to get all agreements in writing and to correspond in writing once you have agreed upon settlement.  Although collection agencies do periodically threaten lawsuits when attempting to collect the debt, they almost never do. Going to court costs money and considering what they have already paid just to get the account, the expense is usually not worth it.

This means that after you have agreed on settling and have paid off the account, it is not in the best interests of the collection agency to still sue anyone. Their main concern as a collection agency is turning a profit on the debt that they have purchased.

Not only should all terms of the agreement be made in writing, you should also make sure you keep copies of everything. When negotiating your settlement over the telephone, keep track of who you speak with, when you spoke with them,  and always ask for a mailing address at the beginning of the conversation. It is also recommended that anything you mail is sent certified with return receipt requested. These steps will eliminate headaches in the future when you are trying to track down the collection agency you have spoken with.

One more tip in negotiating with the collection agency: consider asking how the account will be noted on your credit report. You may be able to ask that the account with the collection agency is completely removed from your credit report. You may also be able to contact the original creditor and notify them that the account has been “settled.” It doesn’t hurt to negotiate everything because in the end, the collection agency does not care how or what is reported on your credit report as long as the debt is paid.

Making Payments to Collection Agencies:

It is often suggested that you should not make payments to collection agents out of fear of judgments and garnishment of your bank account in the future, in addition to fees and interest that may be charged to the account, keeping it from ever being paid off.

If the account is old, the payments may also cause the statute of limitations to start over, so make sure you keep these things in mind when negotiating. Again, make sure all terms of the arrangement are in writing and that you retain copies. Remember that the older the account is, the lower the amount will be that they require for settlement. It is almost always best to wait until you can pay one payment and pay it off completely, rather than setting up a series of smaller payments.