Collection agencies are companies that collect unpaid debts on behalf of creditors. If you have outstanding debts that have gone into collections, you may be wondering how much collection agencies are willing to settle for. Here’s an in-depth look at how collection agency settlements work and how much you can expect to pay.
How Collection Agencies Work
When you fail to pay a debt like a credit card bill, medical bill, or personal loan, your original creditor will often sell that debt to a collection agency after a certain period of nonpayment. The collection agency then takes over responsibility for pursuing repayment of the debt.
Collection agencies make money by collecting as much of the unpaid debt as possible They typically purchase debts for pennies on the dollar, so even a partial settlement still represents a profit for them
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
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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.
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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.
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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.
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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.
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Your financial situation—Many collection agencies are more willing to negotiate a settlement if you can show that you are really having a hard time paying.
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Settlement rules for each agency: All of them want to get as much money as possible, but some have stricter settlement rules than others.
What Is the Lowest Settlement Amount?
Although each case is unique, debt collection companies usually settle debts for 50% or less of the original balance. However, it depends on the factors above. Consumer advocacy groups say that very old medical debt could settle for less than 2020 and new credit card debt may only settle for 80 to 90% of the balance.
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:
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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.
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Pay for delete – Some agencies will remove the negative item from your credit reports entirely in exchange for repayment of the full balance.
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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.
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Bankruptcy – Declaring bankruptcy legally eliminates many types of debts, but it heavily damages your credit.
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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.
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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
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Collection agencies buy unpaid debts for pennies on the dollar, so even partial settlements can be profitable for them.
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Factors like the debt age, type, amount, and your personal financial situation all impact settlement offers.
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Many collection accounts settle for 50% or less of the balance, but start negotiations cautiously and be prepared to compromise.
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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?
Debt collectors typically settle for 30% to 60% of the total owed, but the percentage can vary based on factors like how old the debt is, the collector’s policies, and your 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 do this if: You can’t 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 7-in-7 rule, established by the Consumer Financial Protection Bureau (CFPB) in 2021, limits how often debt collectors can contact you by phone. Specifically, the rule states that a debt collector cannot: Make more than seven calls within a seven-day period to a consumer regarding a specific debt.