How do I negotiate a settlement with a debt collector? | Consumer Financial Protection Bureau (2024)

FAQs

What percentage should I offer to settle debt with a collection agency? ›

“Negotiating with a collection agency can be challenging, but it is vital to reach a fair settlement,” Raymond Quisumbing, a registered financial planner at Bizreport, said. “Offering 25%-50% of the total debt as a lump sum payment may be acceptable.

Some of these factors include the time since your last payment, the total amount owed, whether your account is with the original creditor or a collections agency, and how much you can afford to pay. Typically, you should offer 60% or less of your debt amount to kick off negotiations.

Some will only settle for 75-80% of the total amount; others will settle for as a little as 33%. Looking for a place to set the bar? The American Fair Credit Counsel reports the average settlement amount is 48% of the balance. Again, start low, knowing the debt collector will start high.

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.

Tips to Negotiate with Creditors on Your Own. It is possible to negotiate directly with creditors and settle your debt for less than you owe, but you may want the help of a professional. A quick counseling session from a certified credit counselor can help you discover your options and choose the right path forward.

Verify the debt collector and that the debt is legitimate and dispute the collection if it isn't. If you do owe the debt, it's best to pay it off in full instead of negotiating a settlement. One way to avoid collections is to create a simple budget to ensure your money is going toward all of your current bills.

What Percentage Should You Offer to Settle Debt? Consider starting debt settlement negotiations by offering to pay a lump sum of 25% or 30% of your outstanding balance in exchange for debt forgiveness. However, expect the creditor to counter with a request for a greater amount.

Despite the potential downside, settling a debt by making partial repayment is better for your credit (and peace of mind) than neglecting it and leaving it unpaid. If you ignore a debt, the creditor will typically turn it over to a collection department or third-party collection agency.

If your creditor refuses to negotiate, or won't negotiate, it's in your best interest to get help. There are many other ways creditors can legally collect money that they're owed, and you shouldn't put yourself in an emotionally damaging situation trying to work through the debt negotiation process alone.

What happens when you settle with a debt collector? ›

Debt settlement stops collection calls and further legal issues, but it can lower your credit score temporarily and the forgiven debt is considered taxable income.

Identify, gather and produce the most important information early. Settlement negotiations are most effective at the proverbial sweet spot, when each side has the information it believes it needs to make a judgment about settlement but before discovery expenses allow the sunk costs mentality to take hold.

Debt settlement can eliminate outstanding obligations, but it can negatively impact your credit score. Stronger credit scores may be more significantly impacted by a debt settlement. The best type of debt to settle is a single large obligation that is one to three years past due.

It's better to pay off a debt in full than settle when possible. This will look better on your credit report and potentially help your score recover faster. Debt settlement is still a good option if you can't fully pay off your past-due debt.

It is always better to pay off your debt in full if possible. While settling an account won't damage your credit as much as not paying at all, a status of "settled" on your credit report is still considered negative.

Calculate the Amount You Can Afford to Pay

Instead of letting the debt collector call the shots, look at your budget to see what you can afford. Then, if possible, call the collector once you have enough money for a lump-sum payment of 30% to 50% of the full balance.