Negotiating with collections agencies

By Michael Lloyd

If you have debt that's sold to a collections agency, the best thing to do is face it. Burying your head in the sand will typically result in more fees for you, plus adverse information on your credit report. Neither the debt nor the collectors will go away. Even if paying it off seems impossible, there is likely a solution for you to start clearing your debt and your name.

Believe it or not, you actually have a fair amount of leverage in negotiations by the time your debt is handed over to a collections agency. The company you'll be dealing with won't get paid until you've started paying, and the creditor that owns the debt will be keen to recoup as much of its cash as possible. As such, you might be able to negotiate a discount or request that no more fees are added to your account while you pay it off over time. Here are some tactics to try:

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Full and final settlement
If you have the resources to do so, your best option is to negotiate a full
and final settlement with the collections agency. Depending on the age of your debt, you may be able to settle for as little as 50% of the original
figure you owed.

Use any savings you have to pay it. The interest fees and other charges
will likely outweigh any interest you're earning on money in a savings account, and you could actually end up losing money by making minimum payments even though you have the means to pay it off.

Make sure the collections agency confirms your full and final settlement agreement in writing before making any payments. You should also seek written confirmation that the agency you're dealing with will notify credit reference agencies that you've cleared what you owe once you've settled your account.

Payment arrangements
If you don't have the means to pay in full, you'll need to negotiate an ongoing payment arrangement. The collections agency will typically expect you to use the majority of your disposable income -- that is, the income you have left over after your other bills are paid -- each month to pay off your debt.

If you're unable to offer what a collections agency deems to be a "reasonable" monthly payment, the agency may ask you to complete an income and expenditure form. As the title suggests, this will help you work out what you have coming in and what you have going out each month. MBNA, PayPlan and the Debt Advice Foundation have sample forms on their websites. Even if you don't have to complete a form, you may want to use one before starting negotiations with a collections agency.

If you have no money left at the end of each month, a reputable collections firm should direct you to a free debt counselling service such as StepChange, PayPlan or Citizens Advice. If you are only able to offer a small contribution to your debt, the agency pursuing you may refuse to accept your offer. Under these circumstances, you should continue to pay what you can afford and seek debt advice.

If the agency does accept your offer, however, request that it immediately stop applying fees and charges to your account. There is no point in paying a contribution every month if you're being charged interest and fees that amount to more than your payment.

Once you've agreed to a payment arrangement, set up a direct debit order to pay the figure you've agreed each month.

Many collections agencies take a dim view of debtors who miss payments, and some may reapply fees and charges even after only one missed payment. If you're going to have trouble paying, get in touch with the collections agency you're working with as soon as you can.

"It is vitally important to let creditors know as soon as you think you may not be able to keep up agreed payments on an outstanding debt," Linda Isted, communications manager for the Debt Advice Foundation, said in an emailed response to questions. "Creditors in general recognise three types of people: those who do pay, those who don't or won't pay, and those who can't pay. They chase the middle group, but they will usually try to help those who can't pay find a solution, provided you communicate with them."

See also: Debt collectors: Know your rights, Stop debt collectors digging up dirt on social media

Published: 8 May 2015