Settling With a Collection Agency Can Be Dangerous

Settling with a collection agency may seem like a viable option if the debt collector offers you a good deal, you think you can afford it, and you just want the collection agency to stop harassing you over the unpaid debt. Unfortunately, many consumers have settled a debt with a collection agency only to find themselves with a brand new debt a few months later or worse - in court.

If the unpaid debt the debt collectors claim you owe is particularly old, there is a good chance that you aren’t legally liable for it anymore. This is because a debt collection statute of limitations exists for each state that regulates the amount of time a debt collector has to collect the debt from you. Granted, the statute of limitations only refers to the amount of time a collection agency has to sue you, but if the collection agency can’t sue you to collect the debt, the worst it can do is call you repeatedly and firing off a cease and desist letter takes care of that problem.

Settling a debt, however, resets the statute of limitations as soon as you make the very first payment. Thus, unless you intend to pay off the debt settlement in one lump sum, could put you in a precarious position if you lose your job or miss a payment. Should you be unable to pay, the collection agency will jump at the opportunity to drag you to court and garnish your wages.

Let’s say the original debt you owed was a neat and tidy $500. Once the original creditor charged off the debt, the collection agency added its own fees and interest to bring the debt up to a whopping $800. If the collection agency offers you a debt settlement for $400, you think you’re getting a pretty good deal, right? But what happens to the remaining $400 that you owe? You assume its forgiven debt, but you assume wrong.

Unless you have a written agreement with the debt collector that stipulates otherwise, the collection agency is likely to sell the remaining unpaid debt to yet another collection agency. This will result in more calls from debt collectors, more demanding collection letters and yet another settlement offer. Just how many times do you intend to pay this debt anyway?

Regardless of how much grief the collection agency gives you, the benefit to the whole shebang is that you can count on your credit score improving as soon as the debt is paid off. Uh-oh! Wrong again!

The collection account will appear on your credit report for seven years from the date that the original debt first went 6 months delinquent. As long as that collection account appears on your credit report, your credit score will suffer. Paying a collection account has no effect whatsoever on how the account is scored. In addition, future lenders won’t see a “settled” notation on the account as being positive - far from it. People who routinely settle their debts rather than paying them in full are a danger to lenders. 

You can make settling with a collection agency a positive experience by making a few demands up front.

• Demand that the derogatory collection account be removed from your credit report as soon as the settlement is paid.
• Demand that the collection agency agree not to sell any remaining balance.
• Get a zero balance statement proving that you paid in full.

It is absolutely 100% imperative that you get all of your communication with a collection agency in writing and signed by a representative, if possible. By having documents in writing that protect you, you can settle with the collection agency, improve your credit and move on with your life.

Disclaimer: I am not an attorney and this is not to be taken as legal advice. See a licensed attorney in your state for guidance specific to your situation.