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How To Settle A Debt With A Collection Agency Without Being Scammed

Let me start this article by making it clear that I believe that people should pay their debts in full if they have the ability to do so.  There are times, however, that most people go through when they fall behind on one or more debts and they end up dealing with a third party collection agency. Most people don't know what to do and the most common reaction is to hide out, not answer the phone, quickly throw away the collection letters as they arrive, and hope that they will be forgotten about.  


Over time, the amount that is owed will continue to increase as penalties and interest are piled on over and over again as the months go by.  I have seen cases where the amount of the original debt has multiplied three or four fold. 

What Is A Collection Agency?

Once your account has reached a point where it is deemed unlikely to be collected, it will be transferred to a collection agency.  Some agencies work on a percentage and are paid based on how much they collect.  Many collection agencies actually operate as debt buyers.  In some cases, these firms pay as little as 5 to 10 cents on the dollar to purchase outright the bad accounts.  The company that you owed the original debt to writes it off on their taxes and moves on.  The collection firm that bought your debt is simply playing a numbers game.  Since they pay such a small percentage for the debt, they can be very profitable even if they only collect just a portion of the debts that they have acquired.

Most collection firms will agree to settle your outstanding debt for 50 cents on the dollar (sometimes even as little as 30 %).  In many ways, a reduction of half is fair to all parties concerned since it may be close to the original amount of the debt before penalties and late fees are added. 

Understanding The Difference Between Credit Counseling and Debt Settlement


How To Settle A Collection Debt

You have every right to require the debt collector to provide you with proof that they are the valid owner of the debt (or are legally contracted to collect on behalf of the original creditor).  Without this documentation, you can not be sure that you are even dealing with the appropriate party. Once you are satisfied that the collector is legitimate you can begin negotiations. Contrary to popular belief, you do not need to hire a debt counseling firm or attorney to do this for you.  When I was working in the mortgage business I assisted dozens of clients with debt settlements. Typically I would start by offering 30% of the amount and most often we would come to terms at about 50%.  Once you arrive at the settlement amount, you must get the agreement in writing.  If you don't obtain a written settlement agreement you have literally nothing to prove that the debt has been settled.  

Oddly enough, in the case of older debts, I have had situations where a collector was unable to produce the legal documentation that the debt was valid and consequently wrote it off. This is similar to what some people have found while going through foreclosure and their mortgage company could not locate any of the signed documents. 

Example Settlement Letter

ABC Debt Collections

We agree to accept $500 as payment in full on account number xxxxx with John Doe. We also agree to update the status of this account as 'paid in full' with the credit bureaus.  This settlement will be honored if we receive the above amount by xx-xx-2012.

(one added benefit of a settlement letter is that you can use that to update your credit file by sending it with a copy of your proof of payment directly to the credit bureau)

I have received countless e mails over the years from readers that have told me that a debt collector they are attempting to negotiate with will not give them the settlement agreement in writing.  Typically they are told that it is against a corporate policy or 'we don't do that.' In the end if you stand your ground you will get the settlement letter. If you don't demand this you may ending up simply throwing your money away. As additional protection, be sure to write 'accepted as payment in full' on the money order that you send.  Do not send a check or give them your checking account number.  They may offer you the convenience of a bank draft, but I would absolutely not trust that.  I have seen too many cases where the amount drafted is more than what was agreed to.

Why Payment Plans Are Not A Good Option For Debt Settlement

I have seen so many examples of payment arrangements with debt collectors going bad I simply can't recommend it anymore.  The most efficient way to resolve a debt is to do so in one payment. If you don't have the funds to do that, you would be better off waiting until you do.  Most collection firms are very slippery to deal with.  Your settlement must be as simple as possible and bringing a multiple payment arrangement into play does not usually have a good outcome.  I have seen cases where a person makes a couple of payments and then finds out that the debt has been sold to a new collection firm that won't honor the settlement or credit the prior payments against their debt.  The person they were dealing with leaves the company, etc...  I know this may present a problem when large amounts of money are involved.  If you really must enter into a payment plan due to the size of the debt I would not do so without consulting with an attorney to be sure you are protected.  I would recommend Pre Paid Legal, which provides access to attorneys for $26 per month.  Another option would be to utilize a non-profit debt counseling firm such as Consumer Credit Counseling Services.

What If I Am Sued?

Most creditors will not pursue you in court for smaller unsecured debts (less than $5,000).  One positive of your debt ending up in court is that you could settle it through a stipulation.  This is a legal settlement that is binding and under the jurisdiction of the court.  In the case of a court settlement you don't have to be concerned about a payment plan being honored.  Once a debt becomes a matter of litigation, however, your ability to get a reduced settlement is diminished but may still be possible. This is especially true if the creditor believes that there is a realistic chance that you may end up filing for bankruptcy.

In Review -

1.  Be sure the creditor has the legal right to collect the debt.  Make them prove that with supporting documentation.

2.  Only settle when you can do so with one payment.  If the debt is larger and multiple payments are a requirement consult an attorney.

3.  Make your payment only after you receive a bonafide settlement offer in writing.

4.  Never provide your checking account number.  Pay the settlement amount with a money order and add the phrase 'accepted as payment in full' to the memo section or on the very back above the signature line. 

5.  If your most immediate concern is how to stop collecton calls, view my YouTube video on this topic.


If you are currently working on improving your credit score, I hope you will consider purchasing my new e Book through The book contains additonal information on debt settlement for the purpose of raising a credit score.

I ran across a debt settlement e Book program put together by a guy that settled more than $200,000 in credit card debts.  It is only $19 and seems to be well worth it. 


A book dealing with the legal issues of debt and debt collections I can personally recommend is Debtor's Rights by attorney Gudrun Nickel.  I have interviewed Ms. Nickel multiple times on my radio show and she really knows her stuff.  The book is still available but may be in limited supply as it was published in 1998.

Have your own debt settlement story or advice?  Please use the comments section below to share it.

Helping you make the most of God’s money!

James L. Paris
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