Debt Buyers and How to Negotiate With Them

If you're delinquent on one of your debts, the creditor might sell that debt to a "debt buyer." A debt buyer is different than a collection agency. Debt buyers purchase old debts from original creditors, like banks, credit card companies, and car loan lenders. Unlike a collection agency, which only tries to collect as a service to the creditor, the debt buyer owns the debt.

Understanding what debt buyers are and how they operate can help you negotiate with the debt buyer or figure out a strategy for dealing with your debt. To successfully deal with a debt buyer, you need to be aware that:

• The debt buyer paid very little for your old debt, most likely a few cents on the dollar. The older the debt, the less the debt buyer paid.
• The debt buyer will likely be willing to settle the debt for far less than you owe.
• If you enter into a new payment arrangement with the debt buyer, you could damage your credit scores and make it easier for the debt buyer to sue you. Or you might accidentally revive an expired statute of limitations.
• If the debt buyer files a lawsuit against you, you might have a defense that could prevent it from getting a judgment against you.

For all these reasons, you have a great deal of leverage when negotiating with a debt buyer, much more than you might think.

How Debt Buyers Make Money

Debt buyers typically buy thousands of debts in bulk sales from original creditors at deeply discounted prices. Debt buyers make money by acquiring debts cheaply and then trying to collect from the debtors.

Even if the debt buyer collects only a fraction of the amount owed on a debt it buys—say, two or three times what it paid for the debt—it still makes a significant profit. So, you often get the best settlement offer after a debt buyer has purchased your debt.

What to Do Before a Debt Buyer Files Suit

If you're receiving demand letters and phone calls from a debt buyer about a legitimate debt and the debt buyer hasn't filed a lawsuit against you, the first decision you should make is whether you should ignore the debt or deal with the debt buyer.

When You Can Probably Ignore the Debt Buyer

If the debt is outside the statute of limitations (the period in which the debt buyer must bring its lawsuit), you can safely ignore the debt buyer's demands. Usually, the statute of limitations falls somewhere between three to six years.

When You Should Probably Deal With the Debt Buyer

If the debt is recent and you have income or assets that can be taken to pay the debt, you probably should consider dealing with the matter before the debt buyer sues you. It might make sense to hire an attorney to send the debt buyer a letter asking for additional information about the debt.

Sometimes debt buyers stop their attempts to collect once they know you have counsel. If the debt buyer continues to hound you for payment, an attorney can help you arrange a settlement. You might find that you can reach a compromise allowing you to slash your delinquent debt by as much as 40-75%. (Be aware that you might have to pay taxes on the forgiven amount.)

Removing negative information from your credit reports. You should always ask the debt buyer to have the original creditor remove derogatory information from your credit reports as part of any settlement. The debt buyer is unlikely to agree, but making the request gives you leverage during the settlement negotiations. If the debt buyer believes that your request is a deal-breaker, it might be willing to accept less money in a settlement.

Beware of entering into a new payment arrangement. The debt buyer might pressure you to enter into a payment arrangement because doing so provides it with a stream of income as long as you continue payments. You should only agree to this as a last resort. Here's why. Bad debts will generally remain on your credit reports for seven years. But if you enter into a payment agreement with the debt buyer, this creates a new debt and a new contract. The debt buyer may report this new debt to the credit bureaus. If you miss a payment, it will damage your credit.

Also, the debt buyer could sue you if you fail to make payments under the new agreement. It's much easier for a debt buyer to sue you on a new contract than the original debt.

What to Do If a Debt Buyer Sues You

Some debt buyers sue regularly. If a debt buyer files a lawsuit against you, you should respond and include any defenses you have to the suit, like the debt was discharged in bankruptcy, or the statute of limitations has expired.

What happens when you respond to the suit. If you respond to the suit, the debt buyer will have to prove you owe money and that it owns the debt. Debt buyers rarely succeed in litigation against consumers who fight back. This is mainly because debt buyers often lack the necessary documentation to prove their court case. However, if the debt buyer has all the documentation needed to prove their case, you might want to try settling it before it goes to trial. The debt buyer could be willing to settle for less than you owe to avoid the expense of a trial.

What happens if you don't respond. If you don't file a timely response to the lawsuit with the court, a judge may enter a default judgment (an automatic win for the debt buyer) against you. The debt buyer may then use various collection methods, like garnishing your wages or levying your bank account, to collect from you.

Talk to an Attorney

If you're receiving calls and letters from a debt buyer trying to collect a debt from you, or if a debt buyer is already suing you, consider talking to a debt settlement attorney to find out what to do in your particular circumstances.

And if you have a lot of debts you can't pay, you might want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.