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  • Settling a collection – How much can I save?

    Life happens. We all go through rough financial times. You may have accumulated debt. That debt turned into a collection. And that collection may be holding you back from your financial goals. So what do you do? When it comes to the question of debt settlement – two obvious options are:

    1. Pay the debt

    2. Settle the debt

    Paying the debt is obviously the easiest option, but not necessarily friendly on your bank account. Settling the debt can save you money, but unless you’re a debt negotiator, it will cost you to have a professional negotiate the debt on your behalf.

    So the question becomes … How much can I save by settling a collection? And, is it worth it?

    Creditors Want to Recover Their Money

    Creditors did not become among the largest institutions on the planet by making poor financial decisions. When a past-due account is placed in collections, they are attempting to recover the money they perceive is lost. They know accounts like these are not likely to be collected.

    Example: Your credit card company decides to sell your 500 debt to XYZ Collection Company for pennies on the dollar because it assumes you aren’t going to pay. That’s when you start getting harassed by the collection agency by phone calls.

    A similar situation is when the Original Creditor extends a “Settlement Offer” in attempts to recover more of your debt compared to what a collection agency will pay for it.

    Example: Your credit union decides to make an offer for you to pay your 1000 debt for 600 before it decides to sell the debt to a collection agency for much less.

    Settlement can be a Win-Win for Everyone

    Depending on the situation, if you are in a financial situation to offer a lump sum percentage (25% – 75%) of the amount owed, most companies will accept. This is simple business decision because it will save them money in the long run. The Original creditor doesn’t want to pay someone to harass you for the next several months if they can avoid it. Similarly, collection agencies are happy to get any amount in addition to what they paid for your debt.

    Major Factors in Debt Settlement

    You need to understand the major factors that will influence the outcome of a debt settlement negotiation.

    They are:

    ● How old the debt is
    ● Who the original creditor is
    ● Who the Debt Collector is
    ● The type of debt is it

    Differences in Difficulty between Creditors

    The greatest savings can usually be achieved on settlements with Credit Card Debt. This is because creditors like Bank of America, Chase, Wells Fargo have protective measures that benefit their own pockets. They have insurance on unsecured credit card debt in the event a consumer does not pay back the money they spend. In most cases, these companies will sell a portfolio of debt for pennies on the dollar and write off the balance as a ‘Loss’ on their taxes at the end of the year – effectively ‘cashing in’ on their client’s delinquent accounts.

    On the other hand, some of the most difficult collection accounts to negotiate are the Federal Credit Unions. This is because Federal Credit Unions have a strong focus on record keeping. It is not uncommon for an FCU to extend settlement offers on significantly past due accounts. However, in most cases these organizations will not accept settlement offers from their account holders for amounts less than they owe. When a FCU takes a loss, their entire membership base “pays for it” – so naturally they fight hard to avoid this.

    A Word of Caution

    Beware. Traditional debt settlement programs have open-ended contracts with endless monthly fees and their clients are told to stop paying their bills. This alarming tactic can hurt consumers more than it helps. It can leave a consumer in worse position than before! Be wary of any company that practices similar tactics.

    Most companies will not admit that you can successfully reach settlements on past-due accounts by yourself. However, you need the right information to navigate the process successfully. Naturally, success ultimately comes from having experience negotiating with all types of creditors.

    If you have questions about your specific situation, reach out and talk to us.