If you have ever fallen behind on your bills, you know what it means to be hounded by debt collectors. The constant barrage of late notices and collector phone calls can blend together into one big collection blur. Depending on the length of the financial setback, your debt picture can stay fuzzy for many months, or even years. Once you’re ready to focus on solutions, you may find you can no longer reach out directly to creditors to solve debts. In fact, the longer your bills go unpaid, the more likely it is that you will have to set your sights on dealing with debt collectors and debt buyers. And you should know that not all debt collectors are created equal. It pays to understand the difference between collectors and buyers.
There are a couple of ways you can tell upfront whether you’re dealing with a debt buyer rather than a debt collector. First, when your original creditor sells delinquent credit card debt, they are required to show a zero balance owed to them. The fact that you did not pay for many months leading to your account being charged off will still show on your credit report, but a zero balance owed is a clear indication your account was sold.
You can also call your original lender and inquire about who is collecting. They can tell you whether they sold the account, and to whom. If they still own the account, but have it out for collections, the lender can give you the name of the collector and information about how to contact the collection agency.
However, if you discover that a debt buyer is in charge of collecting on your debt, you may have some options.
How Working With a Debt Buyer Is Different
Some debt buyers have a different view and approach to collecting when compared to third-party collection agencies, and even to the banks themselves. The two things a debt buyer can likely offer, when you are looking to resolve debts with them, are flexibility and patience. In fact, you may have more success when you are proactive about resolving collection accounts owned by debt buyers. Some reasons for this include:
- Credit card banks have up to six months before they must take a loss on your debt. Most banks do not try to collect directly from you after that. If you cannot afford to set up some form of repayment or settlement with your bank in this time frame, you will, more often than not, be forced to communicate with collectors.
- Third-party collection agencies are contractually limited in the time they have to collect from you. If the agency cannot get you to make a payment in, say three months, they lose your account (and any potential fees they could earn from collection efforts). These agencies typically have to apply high-pressure collection tactics, and are the least able to work with you patiently.
- Debt collection attorneys are, well… attorneys. Accounts placed with collection attorneys licensed to practice law in your state will generally mean their patience has reached the end of the line. You can certainly still resolve debts that reach the legal collection stage, but you will also find less flexible options available for doing so.
Debt buyers, in contrast, are generally only limited in their collection strategies by the statute of limitations (SOL) in your state for them to file a legitimate lawsuit. This means that, rather than collection time limits measured in months, they can take a multi-year view of collecting from you. How does that help you? That’s where flexibility comes into play.
Negotiating With a Debt Buyer
It is common knowledge that debt buyers pay very little for the debts they purchase. But those prices reflect the fact that most of the debts they buy will never be collected on. Investors in bad credit card debt generally collect on less than a quarter of the accounts they buy. Even with this low collection rate, debt buyers are willing to settle at a discount. And many offer good payment terms along with the settlements where you pay less than what you owe. Based on my experience, here are some general targets you can prepare for, depending on the type of debt buyer you are dealing with:
- Debt buyers who have their own internal collectors tend to be the easiest to work with. I consistently see settlements with this type of debt buyer at 50% of the balance or lower. In the case of larger debt buyers in this category, you can often get a steep discount when settling, along with six-, 12-, and even 24-month payment terms.
- Debt buyers who use outside collection agencies do offer great discounts as well, but are often much more limited in the amount of time they allow these settlements to be paid. In many cases you will want to be prepared to pay off your negotiated agreements in one to three months.
- Some debt buyers will quickly move to the courts in order to collect by using a network of attorney debt collectors. These accounts can be settled, but be prepared to pay 60% or more of the account balance. If your debts do reach the courts, you may need to be prepared with different strategies to deal with collection lawsuits.
Having helped thousands of people resolve debts at all stages of debt collection, I find people have the most success by being proactive, rather than reacting to collections (such as waiting to be sued to take action). This means reaching out to collectors and debt buyers when you are ready with a plan to put the account behind you.
Getting an affordable payment plan put together will be simple. Just be sure that plan fits in your monthly budget, and you are not spreading yourself too thin. Negotiating with a debt buyer for a lower payoff is not complicated, either. Here again, never agree to any payment, or settlement with payment terms, unless you are confident you can complete the agreement.
Important tips for making payment arrangements
- Negotiations and payment arrangements are best done over the phone.
- Make sure your agreement is outlined in writing and sent to you.
- Get a copy of that agreement on the debt buyer’s or collection agency’s letterhead prior to making any payment.
- Again, be certain everything you would potentially agree to over the phone is clearly outlined in a written settlement agreement.
Debt buyers, like most collection agencies and internal bank collectors, can see your credit report in real time. And debt buyers will often use sophisticated software and collectability scoring models (not credit scores) that help them set their own targets for settling each account. When you speak with a debt buyer about their agreeing to accept less than you owe, be upfront about the financial challenges you face. However, steer clear of offering any detailed financial information if what you share would cause them to view you as more collectable.
Some additional things to consider
- Collectors are trained to try and get a payment commitment from you in every phone call. But you do not have to reach a deal on the first try. They will be there when you call back in a few days or weeks.
- You can expect that any credit reporting by the debt buyer will be updated to show you no longer owe a balance. If it is not updated, you can use the settlement letter and proof of payment to accomplish this yourself.
- If you agree to pay less than the full balance owed over a series of monthly payments, it can often mean paying a higher settlement percentage (10% to 15%) than may have been available if you were to pay the settlement quicker.