Negotiating With Collectors on Unsecured Debts

Here are some options when negotiating settlement of an unsecured debt with a collection agency.

By , Attorney · UCLA School of Law

Most debts that go to collection agencies are unsecured debts, such as credit card, cell phone, utility, and medical debts. If the creditor is flexible, it might accept a settlement below the full amount to avoid spending months futilely trying to collect the whole thing.

If you have some cash to offer a payoff of the debt or want to change the payment terms so they're more favorable to you, consider negotiating with the collector. Options for settling the debt include:

  • offering a lump-sum settlement
  • negotiating improvement to your credit reports, and
  • working out a payment plan.

First, determine whether you should negotiate with collectors on your unsecured debts or pursue other options, like filing for bankruptcy.

Should I Negotiate With Debt Collectors to Settle My Debts?

If you have money available and few unsecured debts, settling them for a lump sum or repaying them through a payment plan might be a good way to dig yourself out of a financial hole.

Be aware that, in some cases, if your debt is canceled, forgiven, or discharged for less than you owe, the amount of the canceled debt is taxable. The IRS generally considers canceled debt of $600 or more as taxable, and settling debts for less than what's owed can increase your tax liability depending on your tax bracket and the canceled amount. Consult a tax professional for more information.

Consider Filing for Bankruptcy Instead

If you have a lot of unsecured debt that you could get discharged (eliminated), bankruptcy might be a better choice. While your credit will take a major hit, it's probably already significantly damaged by your missed debt payments.

The most common types of bankruptcy cases that individuals file are Chapter 7 and Chapter 13. A Chapter 7 bankruptcy case allows you to eliminate many types of debt. A Chapter 13 bankruptcy case allows you to restructure your debts through a supervised repayment plan.

With a Chapter 7 bankruptcy case, you might be able to eliminate most of your unsecured debt, including medical bills and credit cards. You may also surrender real estate or vehicles you've financed if you don't want to keep those debts. With a Chapter 13 bankruptcy case, you repay a portion of your unsecured debts through the court-supervised repayment plan. Depending on your circumstances, you might be able to pay for your vehicle at a reduced rate and also save your home from foreclosure and the vehicle from repossession.

As soon as you file for bankruptcy, an automatic stay goes into place. The stay prohibits most creditors and collectors from continuing collection activity against you. The automatic stay has the power to stop harassing phone calls, lawsuits, garnishments, repossessions, and foreclosures.

What Should I Do First When Negotiating Debts?

If you're sure you want to settle your debts rather than filing bankruptcy or some other option, understand the following key points before you start negotiations with the debt collector or collection agency.

The collection agency didn't lend you the money or extend you credit initially. A debt collector doesn't care if you owe $250 or $2,500. It just wants to maximize its return, which might be a percentage of what it collects or whatever it can collect over the pennies on the dollar it paid for the debt.

Time is money. Each time the collection agency contacts you, whether by letter, call, email, or text, it spends money. The agency has a strong interest in getting you to pay as much as you can as fast as possible. It has less interest in collecting 100% over five years.

Review your debt priorities. It's also important to review your debt priorities before you start negotiations. If you don't have the cash to make a realistic lump-sum offer or to propose a payment plan, don't even talk to the collector—you might make promises you can't keep or give the agency more information than it already has. Or, worse, you could say something that turns an old time-barred debt into a brand-new debt.

What Are Some Options for Debt Settlement?

Here are some options when negotiating with a collector on an unsecured debt.

Offer a Lump-Sum Settlement

If you offer a lump sum to pay off the debt for less than you owe, understand that no general rule applies to all collection agencies. Some want 75%–80% of what you owe. Others will take 50%, while others might settle for one-third or less.

If you can afford it, proposing a lump-sum settlement is generally the best option—and the one most collectors will readily agree to. A collection agency will have more incentive to settle with you if you can pay all at once. If you owe $500 and suggest paying $300 on the spot to settle the matter, the agency can take its fee, pay the balance to the original creditor (who treats the amount you don't pay as a business loss), and close its books. If the collector owns the debt, it keeps the money, which usually ends up being a profit.

Before you make an offer, though, decide your maximum amount and stick to it. Once the collector sees you'll pay something, it will try to talk you into paying more. Don't agree to pay more than you can afford. For help crafting a settlement proposal, get Nolo's eForm Offer to Settle Debt With a Reduced Lump-Sum Payment.

Negotiate Improvement to Your Credit Reports

While you negotiate settlement of the amount you owe, you can also ask the collector to agree to report your debt a certain way on your credit reports. The three major credit reporting bureaus—Experian, Equifax, and TransUnion—produce credit reports.

Ask the collector to tell the bureaus to remove any negative information about the debt from your credit files. The collector might not agree, or it might have to get the creditor's approval, but it doesn't hurt to ask.

Make Payments Over Time

If you say you can pay the debt in monthly installments, the agency has little incentive to compromise for less than the full amount. It still has to chase you for payment, and it knows from experience that many people stop paying after a month or two.

Before a collection agency will consider accepting monthly installments, it might have you fill out asset, income, and expense statements. Two points to keep in mind:

  • You could be giving the collection agency more information about you than it previously had, like where you currently work and bank, and that might not be to your advantage.
  • Don't lie. You might be signing these forms under penalty of perjury. It's unlikely that you would ever be prosecuted for lying on the forms, but if the creditor later sues over the debt, lies can only hurt your case.

If you reach an agreement with the collector, get a written confirmation. For help in crafting a payment plan offer, get Nolo's eForm Offer to Pay Debt in Installments.

Should I Hire a Lawyer to Help With Negotiating My Debts?

A lawyer can negotiate for you if you need help settling your debts. Good debt settlement attorneys have negotiation skills developed over three years of law school, many years of practical experience, and extensive knowledge about debt collections.

And if you're unsure whether negotiating settlements is appropriate for your situation, an attorney can review all of your options and advise you on specific circumstances. A lawyer can help you determine whether you should attempt to negotiate your debts or if you should do something else, like file for bankruptcy. If a creditor initiates a lawsuit against you for a debt, a lawyer can defend you in the suit.

You should not, however, hire a for-profit debt settlement company and be sure to avoid other scammer debt-relief companies.

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