Americans are more in debt than ever before – $1.1-trillion higher than before the pandemic started.
But you made the decision to get out of debt, formulating a plan of action. This can be an exciting, yet overwhelming time if you have several past-due obligations.
Negotiating with debt collectors is intimidating, but here we will show you what you are legally allowed to do to pay the minimum amount possible.
Often, when you call in to get information regarding your account, you will be talking to someone who has worked for the company for less than a year. The debt collection industry is notorious for high turnover, so keep in mind that you may be talking to a 19-year-old kid with zero personal finance experience.
If you’re told the debt has been charged off and sold to another company, you need to ask for documentation in writing. Details such as the creditor’s name, amount owed, and interest rate should be easily obtained.
Often, a debt collector is only worried about collecting a quick payment and moving on, so the information they provide over the phone should be taken with a grain of salt.
Sadly, you can’t trust debt collectors. They are paid to collect dollars, plain and simple. If they spent their shift being completely open, honest, and helpful – they would collect little to no money and be fired within two weeks. It’s just how their business works.
Document everything during a conversation. Get the debt collector’s name, employee number, and even the manager’s name. Documenting each conversation will help you stay organized and updated on how the account is progressing.
After obtaining a clear picture of how much you owe, including fees and interest, it is time to start negotiating.
If you work with a debt collection agency for small businesses, they will typically be willing to negotiate with you because they understand that something is better than nothing.
If you have fallen past due, ask creditors what fees they would be willing to waive. Often, interest charges are not eligible to be waived, but late fees and over the limit fees are.
For example, I have witnessed debt collectors waive over $200 in fees for only a $50 payment. Debt collectors are motivated to get payment; they aren’t worried about the bottom line of the company they represent.
Some creditors will even offer payment plans. For example, the credit card company I previously represented offered a zero APR and waived all fees after an account was four months past due. In addition, if you paid three consecutive minimum payments in a row, they brought the account back to a current status. It was a rare plan that offered hope to past-due customers.
Remember, “It never hurts to ask” when negotiating with a debt collector. A simple question can lead to saving hundreds of dollars!
Debt collectors will always push for payments over the phone. If you tell a collector the payment is in the mail, you can only imagine the eye roll you get.
Collectors want a “check by phone,” or ACH debit over the phone, because it’s a secure and fast payment method. Therefore, they will push hard to get your routing and checking account number on file.
Once you make a payment over the phone, they save your checking account information in their system.
Sadly, there are many stories of collectors pulling payments out of checking accounts without authorization. It is 100% illegal, and any collector caught doing this would be fired on the spot.
Unfortunately, debt collectors usually aren’t thinking about legalities and career advancement.
The average collector focuses on getting their next monthly bonus, leading someone with less than perfect morals the temptation to use your on-file bank information to boost their numbers.
Never pay over the phone with a collection agency to avoid future headaches.
If you notice a payment taken from your checking account without authorization, contact the collection agency and ask for the recorded phone call of the transaction. All check by phone payments should be audio recorded and saved with the file in the event of a dispute.
The original creditor will usually charge off accounts and resell them to other debt collection agencies for pennies on the dollar.
Mainstream advice will tell you to negotiate settlement offers at this point. You may have heard stories of settling a $50,000 account for $2,000! Many collection agencies will be glad to settle an old debt because your credit is already damaged.
Essentially, there is very little a collection agency can do at this point to further ding your credit. If you can settle at a lower amount, the debt collection agency will update your credit bureaus showing the settled and paid-off account, but that occurs after downgrading your credit. The small benefit of paying off these old charged-off accounts is not worth the money it will cost.
After the debt is “charged off” and sold to a collection agency, your credit report will show the charge off for seven years. After seven years of no negative activity, the debt and charge off will fall off your credit report.
While I admire anyone who wants to pay everything owed, the end goal should be getting out of debt and rebuilding your credit. Consider that it will not hurt your credit further if some accounts several years old accounts go temporarily unpaid.
Remember, if you are in a hole, stop digging! The goal is to climb out of debt and move into a new phase of life that is debt and stress-free.
This depends on the type of debt, but most everyone will be dealing with credit card debt. If you have some accounts that are several months past due but not charged off, then you could possibly settle the bills.
For example, if you have an account that you owe $10,000 on, and the account is near being charged off and sold to another agency, creditors will sometimes take a settlement as low as 50%.
The percentage a creditor will take off the total balance will usually fall between 25% and 40%. If you decide to settle an account, it will show as a settlement on your credit report, which is not the same as paying the bill.
It is better to settle an account than to allow a charge off on the account. But if the bill is already showing a charge off, do not settle the account. Pulling your credit report to see the account’s status will give you a definite answer to who owns the account.
Making a plan to get out of debt and break the cycle of being broke is a hard decision. Being in debt is a lifestyle choice that can be as hard to break as an addiction to drinking or smoking.
Now that you have decided to become debt-free, these tips will help you avoid the tricks that professional debt collectors often play.
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