Most people have at one time or another gotten that phone call from a collection agency seeking payment on a past due account. The call may or may not have been preceded by collection letters. Tactics used by debt collectors run the gamut. Some are legitimate businesses following the law, and at the other end of the spectrum you have complete scammers. If you are in the unfortunate circumstance of owing a debt that you can't pay, you don't have to accept harassment. A cease communication letter may be a temporary solution until you have the necessary funds to pursue a settlement.

1. Make Sure The Collection Agency Legally Owns The Debt

If you owe a debt, just pay it - right? I wish it were that simple. Especially, if you are dealing with a third party debt collector and not the original creditor, you need to request proof that they legally own the debt by sending a debt validation letter (see this article The Power Of A Debt Validation Letter).  While you can also use a debt validation letter with the original creditor, it is even more critical with a third party collector. It is also an effective means to confirm what you actually owe (especially with an older debt that you may not remember). See this article - Student Loans Wiped Out As Paperwork Goes Missing.

2. Negotiate A Settlement

The amount the collector is pursuing may be two or three times the original debt (the agreement you signed may have had a provision for late fees, penalties, and interest on a delinquency). You can often negotiate a discount if you agree to immediately pay the debt. Older debts that may have been purchased for pennies on the dollar may be settled for as little as one third. If the debt is still with the original creditor and somewhat recent, you may not get any discount at all (but forgiveness of late fees and penalties is still common). 

3. Payment Plans Are Risky - A Lump Sum Settlement Is Your Best Option

One shady tactic of collectors is to verbally agree to a 'payment plan' in bad faith get your bank account or credit card information. Once they have access to your financial accounts you are taking a colossal risk. They can draft more than the agreed payment amounts and even deny the details of the verbal agreement. I have heard this story countless times over the years. You wake up one morning and you have a negative bank balance, bounced checks, and the world is coming down around you. DON'T TAKE THIS RISK. Any settlement agreement you enter into should be in writing. The best option is a settlement that involves a single payment made with a money order. If the amount is too large to handle in one payment, you can wait to save up the money or make the series of payments with money orders (after you have a signed settlement agreement). 

4. What Happens To Your Credit Score?

Some collection agencies will agree to delete an item from a credit report once it is paid, but many will not. Even if the collection account stays on your credit file, you can send a copies of your settlement agreement and proof of payment to have it updated to show a zero balance. The status will then be changed from 'collection' to 'paid collection.' After a few months the account will become dormant and have little effect on your credit score. 

My Book (available at Amazon has more details on credit scoring and dealing with collection accounts). The book also includes a number of very popular letters for settling and updating credit accounts.

5. Statute Of Limitations And Your Rights

A debt is only legally collectible for a set period of time (state by state statutes of limitation). You must be very cautious when dealing with a debt that has aged beyond your state statute. If you make a partial payment on an old debt, you may risk restarting the clock on the time limit (this means that the creditor could bring a lawsuit against you). One attorney told me that even just verbally agreeing to pay an old debt could restart the statute of limitations. If you owe an older debt that has legally aged out, be sure and do so with a single payment and a written agreement. A legal service I have used for years (and also have an affiliate agreement with) can be accessed at DefendYourRights.US. For a flat monthly fee you can access their attorneys for a wide range of legal services, including advice and assistance on debt settlement.

Conclusion

One final recommendation is to be sure and set up a file and preserve your documentation and proof of payment forever. Previously I have advised readers that ten years was long enough, but I have heard too many stories of old debts coming back to life even after decades! Even with the protection of the statute of limitations, keeping the documentation for the long run is a worthwhile insurance policy. See this article - A debt collector contacted me about a debt I already paid.

Helping you make the most of God’s money!

James L. Paris 
Editor-In-Chief ChristianMoney.com 
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Christian Financial Advice 
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