Negotiating With Debt Collectors

Authored By: Lagniappe Law Lab
Read this in: Spanish / Español


Negotiating with debt collectors is a possible option to resolve a debt collection lawsuit without going to court. Most creditors will accept a reasonable offer to avoid going to court.

Early communication with the collector can be beneficial. You can settle a debt before trial either through direct negotiation with the debt collector or with the help of a third party. 

If the case does go to court, it is important to prepare a defense with all necessary documents and evidence and attend all court hearings on time. 

What You Need To Know

Creditors often are willing to settle debts for less than the full owed amount, especially when the alternative might be that the debtor defaults entirely or declares bankruptcy. The negotiation process and the final settled amount can depend on various factors, including the debtor’s financial situation, the age of the debt, and the creditor’s policies.

Percentage Accepted:

  • Ranges: Creditors might accept anywhere from 20% to 80% of the outstanding debt, depending on circumstances.

  • Common Settlements: Many debt settlements, particularly for older debts purchased by collection agencies, can end up being between 30% and 50% of the original amount.

Influencing Factors:

  • Financial Hardship: If you can demonstrate genuine financial hardship, creditors might be more willing to settle for a smaller percentage.

  • Age of Debt: Older debts, particularly those nearing the statute of limitations, may be settled for smaller sums.

  • Collector Type: Original creditors may be less willing to settle for a low amount compared to collection agencies, which might have purchased the debt for pennies on the dollar.

  • Legal Standpoint: If there are any discrepancies in the paperwork or potential legal issues with the debt, creditors may be more willing to negotiate.

The parties to a debt collection lawsuit can reach a settlement without having a trial at any time more than twenty (20) days before the time specified for the trial on the matter. The debtor or the creditor may reach out to come to a settlement agreement before the trial, where the debtor agrees to pay a negotiated amount, which could be less than the amount claimed. 

While lump-sum settlements are common, in some cases, you might be able to negotiate a payment plan. However, collectors often prefer a single payment.

A Debt Settlement Letter is a written request to a creditor or debt collector to settle a debt for less than the full amount owed. The agreement should include the settlement amount, payment due date, how the payment will be made, and that the payment settles the account in full. The letter should include the following information:

  1. Your name and contact information
  2. The creditor's name and contact information
  3. The account number and amount owed
  4. A statement that you are requesting a debt settlement
  5. An offer to pay a specific amount to settle the debt
  6. A request for the creditor to accept the offer and consider the debt settled
  7. A statement that the settlement offer is contingent upon the creditor agreeing to remove any negative information from your credit report
  8. A deadline for the creditor to respond to the settlement offer

You should also keep a copy of the letter for your records and send it via certified mail with a return receipt requested to ensure that the creditor receives it.

It is also recommended to consult with an attorney before sending a Debt Settlement Letter to ensure that it is appropriate for your situation and that you are not inadvertently waiving any legal rights or protections.

Ensure that the payment is processed and check your credit report to confirm that the account status has been updated accordingly.

If you have a written agreement and have adhered to it, collectors typically cannot seek additional payments. Keep all documents related to the settlement indefinitely.

How To Negotiate A Settlement With A Debt Collector

How To Negotiate A Settlement With A Debt Collector

Navigating the complexities of negotiating with a debt collector involves understanding your rights, being well-organized, and maintaining a calm and strategic approach. Initially, ensure validation of the debt, requiring the collector to prove that the debt is yours and is still within the legal timeframe for collection. Once verified, assess your own financial situation and determine a realistic repayment plan that you can afford.

Steps To Negotiating A Settlement With A Debt Collector

Ensure that you owe the debt claimed by the creditor is legitimate and accurate

When debt collectors contact you, they must give you certain information about the debt they say you owe or they should provide it within five days of first communicating with you. Generally, debt collectors must provide this information in writing, either in the mail or electronically.

This validation information can help you figure out if you owe the debt and will provide information on how to dispute it if you don't. If you're unsure who you owe money to or how much you owe, you can request the debt collector provide more information about the debt by sending a debt validation letter. 

Ensure the debt is within the statute of limitations

Make sure the debt is still legally enforceable, making sure it has not aged out of the legal timeline for collection. 

Once you confirm that you owe a debt, you can pay in full or propose a repayment plan to the debt collector. If you want to make a proposal to repay the debt, here are some questions you should ask yourself: 

How much can I realistically afford to pay each month?

Review your current financial obligations. Write down your monthly take-home pay and your monthly expenses, including the amount you want to repay each month. Try to allow some income left over to cover unexpected costs and emergencies. Remember that falling behind on other bills, even if you're paying off this debt, could cause you more problems. If you're struggling, a non-profit credit counselor can help you create a budget and work with the collectors. 

What amount am I willing to pay to settle the entire debt? 

This could be one payment or a series of smaller payments. Don’t pay more than you can afford. If you have more than one debt with a debt collector, you can direct the debt collector to apply your payments to a specific debt. Debt collectors are not allowed to apply a single payment for multiple debts that you’re disputing.

Avoid companies that charge money in advance to settle your debts for you

Dealing with debt settlement companies can be risky. Some debt settlement companies promise more than they can deliver. Certain creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company won’t be able to settle the debt for you anyway.

Explain your plan 

You can send a Debt Settlement Letter to the creditor or debt collector requesting them to take a lowered percentage of the original debt and start negotiations from there. 

When you talk to the debt collector, explain your financial situation. You may have more room to negotiate with a debt collector than you did with the original creditor. It can also help to work through a credit counselor or attorney.

Record your agreement 

Always ensure to get the settlement agreement in writing before making a payment, and make sure the document specifies that the agreed-upon amount fully satisfies the debt​​​​​​.

If you agree to a repayment or settlement plan, get the plan and the debt collector’s promises in writing before you make a payment. Those promises may include stopping collection efforts and ending or forgiving the debt once you have completed the plan.

Know your rights 

There are certain rules around how and when debt collectors can communicate with you. The FDCPA prohibits debt collectors from placing repeated or continuous telephone calls or conversations with the intent to harass, oppress, or abuse you.

If you’re having an issue with debt collection, you can submit a complaint with the CFPB.

Other Issues To Consider

Other Issues To Consider

These are the other considerations or issues to consider as it relates to negotiating a settlement agreement with a debt collector. 

Other Issues To Consider

A debt settlement plan, where a debtor negotiates to pay less than the total amount owed to resolve their debt, can indeed have tax implications. Please note that specific tax consequences can be complex and may require consultation with a tax professional.

The IRS typically treats canceled debt as income, and thus taxpayers must report it on their tax return. If the debt was canceled in bankruptcy, it might not be considered taxable income. 

Similar to federal tax laws, Louisiana may also consider canceled or forgiven debt as taxable income. 

When your debt is canceled or forgiven, you should receive a Form 1099-C (Cancellation of Debt) from a lender. 

Debt settlement typically involves negotiating with creditors to pay a reduced amount of the total debt owed, often facilitated through a debt settlement company or through direct negotiation. While it might provide relief in terms of reducing the financial burden, it does have implications for your credit health.

Impact on Credit Score

  1. Negative Entries:

    • When you settle a debt for less than the amount owed, it generally gets reported to the credit bureaus as "settled" or "account settled for less than the full amount." This is a negative entry that suggests to future creditors that you did not meet your full repayment obligations.
  2. Decrease in Credit Score:

    • This negative entry tends to lower your credit score because payment history is a significant factor in its calculation. Settling a debt implies a breach in the original lending agreement, which indicates higher risk to future lenders.
  3. Late Payments:

    • Before a debt gets to a settlement stage, there are often multiple late payments, which are also recorded on the credit report and significantly impact the credit score negatively.
  4. Charge-Off Status:

    • In many cases, settled accounts have also been charged off by the creditor (written off as a loss). A charge-off is another negative entry on a credit report.

Appearance on Credit Report

  • Duration:
    • Negative information, like debt settlements, typically remains on your credit report for a specific period. In the U.S., for instance, a settled debt can stay on your credit report for up to seven years.
  • Future Lending Implications:
    • When future lenders review your credit report, they'll see the settlement, which could impact their decision on whether to extend credit, the amount, and on what terms. A history of debt settlement might signal that you represent a higher lending risk.
  • Renting or Employment Consequences:
    • A lower credit score and negative entries on your credit report might not only impact future lending but also affect your ability to rent a home or even have implications in employment opportunities in some cases.
Last Review and Update: Oct 02, 2023
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