Most people are aware when they have fallen behind on their debts, so it comes as no surprise when the phone rings and a collection agency answers.

While it’s understandable if your stomach flips like an Olympic gymnast every time you’re contacted about an unpaid debt, it is possible to negotiate settlements with collectors and pay less than the amount owed.

It’s not simple, but it is achievable. There are rules in place to safeguard customers during debt collecting. Learn the regulations so you don’t get taken advantage of.

If a debt collector contacts you about a past-due bill, you should verify the debt and the collection agency to ensure their legality. If both are valid, it is preferable to address the issue head on and seek to resolve it, as unpaid debts may lead to the debt collector suing you for the amount owed.

How Do Debt Collection Agencies Work?

The initial creditor normally gives you six to nine months to pay. If no payment is made, the creditor often sells the debt to a collection agency, who will contact you to collect. Collection agencies are able to contact you via cell phone, mail, or social media. They will utilize all of them, therefore the best advise is to pick up the phone or send an email.

Ignoring debt collection calls can be harmful to your health, both physically and financially. Do not do it. You must confront the problem head on, beginning with requesting documented evidence of the loan amount and the identity of the creditor who held the loan before the collection agency became involved.

Collection agencies are required to follow certain consumer protections. (More about that later.) Make careful you get the outstanding loan and repayment terms in writing, as well as written confirmation of any settlement offers made by the collection agency.

If you’ve gotten dangerously behind on your debt and haven’t considered the ramifications of allowing it to grow, now is the time to take a more proactive approach by learning how to negotiate with collection agencies to settle your debt.

Should You Negotiate With Debt Collectors To Settle Your Debt?

If you have the means to pay off the debt you owe in a lump sum, that’s the best thing you can do for your credit report. Having a debt turned over to collection is a blemish that remains on your credit report for seven years.

Chances are that being cash strapped is how you fell behind in the first place. Negotiating with a debt collector happens at the discretion of the collection agency but most are open to a settlement for less than what is owed to avoid a long-drawn-out collection process.

“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. The actual percentage may vary depending on the circumstances of the borrower as well as the prevailing practices of that particular collection agency.”

One benefit of negotiating settlement terms is likely to reduce stress. Reaching a settlement can also reduce the credit implications since debt that goes to a collection agency is a major hit on your credit score and can affect the interest rates you’re offered on future loans.

“When a debt goes to a collection agency, it’s like a black mark on your credit report, similar to a bad grade on an otherwise stellar report card,” Allen said. “It can significantly lower your credit score.

“This mark stays on your credit report for seven years from the date of your first missed payment. It’s a long time, but the impact on your credit score diminishes over time, especially if you offset it with positive credit behavior.”

How to Negotiate With Creditors and Collection Agencies

You may be able to settle the debt by negotiating for a lower amount than you owe. Here’s how to bargain with debt collectors and how it may affect your score.

Here’s a breakdown of steps you can take to negotiate with a debt collector and resolve your debt.

1. Verify the Debt

Before dealing with the debt collection agency, it’s best practice to confirm the debt.
Under the Fair Debt Collection Practices Act (FDCPA), you should receive a debt validation letter detailing the specifics of the debt within five days of initial contact with a debt collector. This notice is often included in the company’s first written communication with you.

If you didn’t receive the debt validation letter, request one in writing before discussing any details, negotiating or making payments. Once you receive your notice, you have 30 days to challenge inaccurate information by sending a debt verification notice, asking the collector to prove you owe them money or requesting further information. During this period, the collector must pause collection activities—and may not report the account to credit bureaus—until they provide you with written verification of the debt.

• Debt Validation Letter Information

When you receive a debt validation letter, it should include pertinent information regarding the debt, such as:

• The original creditor you owe the debt to, including their contact information
• The full and itemized amount of the debt
• The date the debt became delinquent

The letter should also provide information on how to dispute the debt if you don’t believe you owe it. You can file a complaint against the collector with the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC), and your state’s attorney general’s office if they fail to provide sufficient evidence of the debt but continue collection efforts.

Read Also: Pros and Cons of Co-signing a Loan

Remember, it’s a good idea to be cautious about talking with a debt collection agency before verifying the debt. You could inadvertently acknowledge the debt as valid, which might restart the statute of limitations on the debt.

2. Verify the Debt Collection Company

While you’re confirming the debt, it’s also a good idea to confirm that the collection company has a legitimate cause to collect. While there are many reputable debt collection companies, the industry also has its fair share of less-than-credible actors committing scams. Here’s how to verify a collector has the authority to collect any debt from you:

• Ask the collector for the collection company’s name, contact information and professional license number if your state requires them.
• Contact your creditor to confirm your account fell into collections and get the name of the debt collection agency that acquired your account.
• Search the National Multistate Licensing System (NMLS) Consumer Access using your debt collector’s name and license number to verify the company’s legitimacy.

If you can’t confirm the agency’s legitimacy and you have reason to believe it’s a scam, consider consulting with a consumer protection attorney to explore your options. If you determine the agency and the debt is valid, consider paying the debt in full if it’s within your means or negotiating for a lower debt amount.

3. Assess Your Finances to Identify Your Best Payment Option

After you verify the debt, start reviewing your finances to determine the best path to satisfy the debt. The fastest and most straightforward option is to pay the amount in full. If that’s not an option, review your income and expenses to see how much you can comfortably pay. Agreeing to payment terms beyond your financial ability could make it challenging to pay your other bills and cause more financial hardship.

Before contacting the debt collector, determine the maximum amount you’re willing to pay and decide what payment option is best for your situation.

• Reduced Lump-Sum Payment

If paying the full amount isn’t possible, explain your financial situation to the debt collector. They may be open to negotiating a lower repayment, especially if you can pay it upfront. In many cases, accepting a reduced payment could be in the debt collector’s best interests. Since the collection agency purchased your debt from your original creditor—likely for pennies on the dollar—they may prefer accepting a reduced payment to recover their investment and make a profit more quickly.

Before you suggest a lump-sum amount, determine the maximum amount you can afford and don’t budge. Start with a low offer, such as 25% of the debt you owe, and work toward a middle ground. Your debt collector may accept a lump—sum repayment amount between 25% and 50% of the full debt, but that is no guarantee. Some collection agencies require the full debt amount, while others are willing to work with debtors to varying degrees.

• Repayment Plan

If you can’t agree on a reduced lump-sum payment, you might negotiate a repayment plan that fits your budget. But, before discussing a monthly payment plan with the debt collector, focus on coming to an agreement on the total debt amount. Once that figure is established, setting up affordable monthly payments becomes more straightforward.

Make sure any payment amount you agree to doesn’t compromise your ability to pay essential expenses like rent or mortgage, utilities, gas and food. If you can’t reach an agreement that fits your budget, end the call. Try contacting the debt collection company again in a few days, as you might get a different representative who may be more inclined to accept your offer.

4. Get It in Writing

As you negotiate, take copious notes, particularly on the collector’s claims and any agreements reached. You should also record your talk (if your state legislation permits it) and keep emails, texts, and online conversations.

Finally, if you agree to a partial repayment or payment plan, ensure that it is documented in writing on company letterhead. Insist on a formal agreement that states the debt collection business will delete any negative reporting from your credit report. Documentation and written agreements may help to avoid future misunderstandings.

How to Deal With Creditors When you Can’t Pay?

When your income reduces and you discover you can’t pay all of your obligations, it’s critical to confront your debts and understand how to interact with your creditors.

Your previous interactions with creditors are significant. If you have always paid your bills on time, your creditors will be more accommodating than if you were late or did not make regular payments. Creditors lend money and/or provide services. They want to keep your business but also want to be compensated.

Contact your creditors promptly; do not wait for them to contact you. Even if your payment history is not flawless, being open and honest will help you create better arrangements. Explain the existing circumstance. Inform them that your family’s income has been decreased and you are unable to make your payments. Discuss your future income prospects openly with your creditors so that you and they may work out a solution. Most creditors would prefer to receive lesser payments on a regular basis rather than initiate costly collection operations.

Once you have gathered the information you need, contact each creditor, explain your family’s situation, and ask for their assistance in working out a solution.

Be prepared to explain the following:

• The reason you cannot pay.
• Your current income and prospects for future income.
• Other obligations.
• Your plans to bring this debt up-to-date and keep it current, including the amount you will be able to pay each month.

Visit local creditors in person. Visit the loan officer at your bank or credit union, the credit manager of local stores, and the budget counselor at the utility company. Don’t forget creditors like your dentist, physician, clinic and hospital.

Contact out-of-town creditors by phone or letter. If you phone, write down the name and title of the person to whom you talked. Follow the conversation with a letter summarizing the agreement between you and the creditor. Keep copies of your correspondence as well as any replies.

As you negotiate with each of your creditors, don’t agree to any plan simply to get off the hook. Be sure you will be able to follow through on the agreement. Establish a payment rate that is acceptable to both you and the creditor.

Here is a list of some alternatives to consider when negotiating with your creditors:

• Reduce the monthly payment.
• Refinance the loan.
• Defer a payment for a short time if you expect your income will increase soon.
• Reduce or drop late charges.
• Pay only interest on the loan until you can resume making monthly payments.
• Voluntarily surrender or give back an item purchased on credit.
• Sell the item and use the cash to satisfy, or partially satisfy, the debt (you are still responsible for any remaining balance).

Not all creditors will be willing to accept alternatives. However, they’ll be more likely to work with your family if you contact them before they contact you. They all want to be repaid and would rather get some money on a regular basis than have to begin expensive collection procedures.

Tell your creditors about any changes that may affect your payment agreement. If you fail to follow the plan that you and your creditor agreed upon, they will be less willing to work with you. You will also hurt your chances of getting future credit.

If you owe a large amount of money, and if your creditors won’t accept reduced payments, you may have to consider more extreme alternatives such as arranging for debt payment through a credit counseling service or filing bankruptcy.