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Articles - Money Management
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Back to Money Management view printable version 
Paying Off Collection Agencies
We have researched some guidelines in regard to paying off collection agencies that we hope you will find useful. These guidelines are from the book "Road to Debt Freedom: Paving the Way to Prosperity" by S. Todd Cook and Michael A. Kiffner.
1. In some cases, debtors can negotiate settlements for 50%-70% on the dollar.
2. Try to use the amount of the debt that you borrowed (your debt before interest) as a worst case scenario for settlement.
3. When you first engage in negotiations with the creditors, start low on your settlement figure.
4. Let your creditors know that they are just one of many (debts that you owe) and you are making a last ditch effort to repay them.
5. Be firm and request to speak to the person that makes the decisions.
6. Try to make the settlement as "credit report friendly" as possible. As part of the settlement agreement, request that the creditor remove all references to the account from your credit report. If they won't, ask them to simply report the account as "paid" instead of "settled" and remove all references of delinquency, charge-off, collections, or repossession. Your success will depend on the policy of the creditor that you are dealing with. In worst case, the account may appear on your credit report as "settled" or "bad debt" and reflect the charge-off, collections, or repossession. At least you have gained by paying your debt off at a discount. It will show that you took the responsibility to pay your debt off regardless of the fact that the debt was settled. (You and/or your spouse will have to decide if it is worth it to settle the debt if they do not agree to mark the debt as "paid." We would be happy to discuss that determination with you as well.)
7. Always get any form of settlement agreement, in writing from the creditor. Include specifications on how the account is reported to the credit bureau prior to sending a settlement payment.
One additional, but very important, note: there may be tax implications to settling debts. The Internal Revenue Service requires financial institutions which forgive or write off $600 or more of a consumer's debt principal (the amount not including interest or fees) to send the consumer and the IRS a Form 1099-C at the end of the tax year. The IRS may also require consumers to report the amount on the Form 1099-C as income. However there are some exceptions to this rule, so we would encourage you to talk to your tax advisor if you will be settling any of your debts to find out if you qualify for one of the exceptions. You may also find the following IRS contact information useful:
To ask questions: (800) 829-1040
To request tax forms: (800) TAX-FORM (829-3767)
Finally, a recommendation from Lighthouse Credit Counseling is to be patient. We have dealt with collection agencies and know that the process is not always easy. However, because negotiations usually benefit both parties, being persistent should help you to get a good deal.
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