Many Americans are struggling financially due to factors such as high inflation and correspondingly high interest rates, which increase the costs of financing. And, once you get into debt, it can be hard to get out, considering that you not only need to save up enough or divert money toward the initial amount owed but also need to pay interest on the balances youve been carrying.
Meanwhile, other essential bills, like housing and food, have increased recently due to inflation, causing some people to fall further behind on debt payments. For example, the number of credit card and auto loan delinquencies has been on the rise recently, according to the Federal Reserve Bank of New York.
If you don’t pay your debts on time or stop paying altogether, you may be contacted by debt collectors. If you don’t respond, they may take legal action against you and take your property. The good news is that if you owe money and someone is trying to collect it, you can usually work out a deal where you pay less than the full amount.
Collection agencies are businesses that go after people who owe money on their behalf. You may be wondering how much collection agencies are willing to settle for if you owe money and your debts have been sent to them. Find out how collection agency settlements work and how much you can expect to pay.
How Collection Agencies Work
People who owe money on things like credit cards, medical bills, or personal loans often sell those debts to debt collectors after a certain amount of time has passed. After that, the collection agency is in charge of trying to get the debt paid back.
Collection agencies make money by getting as much of the unpaid debt as they can. They usually buy debts for very little money, so even a partial settlement still makes them money.
Factors That Determine Settlement Amounts
There’s no one-size-fits-all formula for how much collection agencies will accept as a settlement Each case is different, but some key factors include
-
Age of the debt: A collection agency is more likely to settle for less if the debt is old. The chances of being paid back in full drop over time.
-
Debt category – Medical debt and credit card debt tend to have higher settlement rates than things like personal loans or auto loans that are secured by collateral.
-
Debt amount – For smaller debts under $1,000, collection agencies may insist on a higher percentage repaid versus large debts where they settle for a smaller portion.
-
State statutes of limitations – If the debt is nearing the statute of limitations for legal action in your state, the agency may settle for less rather than risk getting nothing.
-
Your financial situation – If you can demonstrate true financial hardship, many collection agencies are more flexible on settlements.
-
Agency settlement policies – While all agencies want to maximize collections, some have more rigid settlement rules than others.
What Is the Lowest Settlement Amount?
While every case is different, collection agencies often settle debts for 50% or less of the original balance. However, it depends on the factors above. Recent credit card debt may only settle for 80-90% of the balance, while very old medical debt could potentially settle for under 20% according to consumer advocacy groups.
When making a settlement offer, start low but be realistic. Collection agencies expect some negotiation and typically won’t accept an overly low initial offer. Many experts suggest starting at 25% of the debt and increasing your offer slightly until you reach an acceptable agreement.
Get any settlement details in writing before sending payment, and keep documentation of the settlement in case of issues down the road. A written agreement protects you legally if the collection agency attempts to collect on the debt again.
Alternatives to Settling
Settling for less than you owe seems appealing, but it’s not the only option. Here are a few alternatives to consider:
-
Payment plans – If you can’t pay the balance in a lump sum, some collection agencies will work out a monthly payment plan. Just be sure it’s affordable for your budget.
-
Pay for delete – Some agencies will remove the negative item from your credit reports entirely in exchange for repayment of the full balance.
-
Debt consolidation loan – Borrowing a lump sum to pay off the collection account can simplify payments into one monthly bill at a lower interest rate.
-
Bankruptcy – Declaring bankruptcy legally eliminates many types of debts, but it heavily damages your credit.
-
Debt validation – You have the right to request proof that you actually owe the debt and dispute any errors. This can strengthen your negotiating stance.
-
Ignore the debt – Ceasing communication with collection agencies is an option, but one that comes with risks like continued credit damage and potential legal action.
Key Takeaways
-
Collection agencies buy unpaid debts for pennies on the dollar, so even partial settlements can be profitable for them.
-
Factors like the debt age, type, amount, and your personal financial situation all impact settlement offers.
-
Many collection accounts settle for 50% or less of the balance, but start negotiations cautiously and be prepared to compromise.
-
Other alternatives like payment plans, debt consolidation, and bankruptcy may be better options depending on your circumstances.
Settling with collection agencies can resolve debts and stop credit damage, but proceed with caution, get agreements in writing, and explore all your options first. The key is finding the resolution approach that best fits your financial situation. With persistence and savvy negotiating, you can often settle collection accounts for much less than the original amount owed.
Who the debt collector is
Not all debt collectors are the same, and that can affect your debt settlement.
“Every creditor is different. Some creditors will accept pennies on the dollar, others will not settle for less than 80% in a lump sum payment,” says Jessika Arce Graham, partner at Weiss Serota Helfman Cole + Bierman.
However, your odds of a lower settlement are better when the debt collector is a debt buyer, says Christopher E. Roberts, partner at Butsch Roberts & Associates LLC.
“Debt buyers are typically companies that purchase large amounts of delinquent debts from the creditor or another debt buyer,” Roberts explains.
The reason why debt buyers often settle for less than whats owed on the debt is that they typically purchase debt for a fraction of the cost.
“Thus, if a debt buyer purchased a $1,000 debt for $30-$50, then a consumer may have more options to settle for significantly less than the full balance, as the debt buyer would stand to make a large profit in this scenario, even if they settled for $500,” adds Roberts.
How you go about trying to pay off your debt can also affect how low debt collectors will settle for.
“Creditors are more willing to accept an offer when there is cash up front over a payment plan,” says Arce Graham.
That said, you want to be sure that you understand the fine print of any debt settlement offer you agree to, as you might not be as done with that debt as you assumed.
“Always be aware that making a payment will likely restart the statute of limitations for the debt to be pursued against you in court,” says Roberts.
What is the lowest amount debt collectors will settle for? What experts say
The short answer is that theres no universal settlement amount that debt collectors will accept. Every situation is unique. However, there are some factors that help dictate the lowest amount debt collectors will take as a settlement, including the following:
How Do I Handle Debts That Are In Collections?
FAQ
What percentage should you offer to settle a debt?
“Offering 25%-50% of the total debt as a lump sum payment may be acceptable. The actual percentage may vary depending on the circumstances of the borrower as well as the prevailing practices of that particular collection agency. ” One benefit of negotiating settlement terms is likely to reduce stress.
How much will a collection agency settle for?
Collection agencies usually agree to 20% to 60% of the total amount owed, but the exact percentage can change depending on things like how old the debt is, the collection agency’s rules, and your current financial situation. Older debts or those unlikely to be collected in full usually result in more favorable settlements.
Will creditors accept 50% settlement?
Not all lenders accept partial settlement offers. They are more likely to if: You cannot afford to pay them back in a reasonable amount of time or. You may never be able to pay them back in full.
What is the 7 7 rule for collections?
The Consumer Financial Protection Bureau (CFPB) made the 7-in-7 rule in 2021. It limits how often debt collectors can call you. In particular, the rule says that a debt collector can’t: Call a customer more than seven times in seven days about the same debt;