Debt Settlement: Dealing with a Collections Agency

If you are working with a debt settlement agency to reduce your debts, you may run into hurdles with debts that have already gone into collections. Collections agencies have assumed the responsibility of recovering for the initial lender. They will be earning a fee for their services, but they will earn this fee only if they collect on the debt. They may not be able to issue a settlement quote or accept anything less than payment in full.

Debts in Collections

A debt goes to a collections agency when the lender essentially has written it off as a bad debt. The lender has moved it to a negative asset on a balance sheet. Anything recovered from this point forward will be just a bonus, which is why the lender is willing to pay an agency if collection does occur. The collections agency will typically be operating on a percentage-based fee. This means the agent will make an income only if he or she can collect the sum, and the agent will make a percentage of the sum collected. In most cases, there is no payoff if the sum is not recovered. The lender has nothing to lose by contracting an agent. The lender also has nothing to lose in settlement at this point. However, the collections agent stands to lose quite a bit if the debt is settled for less than the full amount.

Original Lender Involvement

The original lender is not likely to get involved once a debt has gone to collections. If the debt is settled for less than is owed, the lender makes a modest profit. Since the lender has already written off the debt as a loss, the size of this profit is not of importance to the lender. Similarly, if the collections agency collects in part, the lender still makes a modest recovery. As a result, the lender has no interest in taking part in the settlement talks or working with the settlement company once the debt has gone to collections. The lender is allowing the collections agent to do work as an independent contractor, not as a representative of the initial lender.

Collection Agency Fees

There are two essential charges you can attempt to settle once a debt has gone to collections. The first is the principal debt. The second is the collection agent's fees. The agency may be imposing financing fees on the debt as they try to collect. When you negotiate with the collections agent to settle the sum, you may be able to offer a reduced principal settlement while still paying the financing fees. The collections agent will still make money, and the original lender will still make money. This can present a win-win situation for all those involved. However, you will have to offer to cover enough of a fee to make up for lost income the agent may see by reducing the settlement and not collecting as much from the lender. If you can work out the deal, you will save money, get the agent off your back, and eliminate the debt.


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