Collection Agencies and Debt Settlement: What You Need to Know

A collection agency purchases debts from creditors that are unable to collect them. It then tracks down the debtors and tries to convince them to pay what they owe. A common collection tactic these companies use is to offer consumers debt settlement agreements. Because a collection agency can purchase debts for mere pennies on the dollar, debt settlement agreements can be quite profitable for the company. If you are considering taking advantage of a settlement offer from a collection agency, it is vital that you understand just what that settlement entails.

Paying the Collection Agency Will Not Improve Your Credit Score

When you review a settlement offer, you may notice the statement that your account will be reported as ”settled” with the credit bureaus. Do not interpret this to mean that your credit score will improve. Collection accounts are scored in the same manner regardless of whether they have been paid in full or settled.

When lenders review your credit report, a collection account that has been settled may look slightly better than an account that still shows an outstanding balance. This is unlikely, however, to have an effect on whether or not future lenders opt to extend credit to you. A collection account is considered derogatory by all credit scoring systems and lenders, regardless of its payment status.

Settling the Debt May Leave You Vulnerable to a Lawsuit

If the debt you owe is old, is may be beyond your state’s statute of limitations for debt collection. For debts like these, collection agencies may attempt to collect, but they are not able to collect via a lawsuit. By agreeing to a settlement and making a payment on the debt, you reset the statute of limitations that previously protected you. The collection agency is then able to sue you. If you are making payments toward your debt settlement, a lawsuit is unlikely. Missing just one payment, however, can land you in court over a debt that you were not originally legally liable for.

The Unpaid Balance May Be Sold

When a collection agency offers you a debt settlement, it is agreeing to allow you to pay only a portion of the balance you owe. It is not, however, agreeing to forgive that balance. A collection agency may collect a debt settlement from a consumer and then sell the outstanding balance of the debt to another collection agency. The result, of course, is that the consumer is contacted by another company over a debt he believes he has already paid.

Given that collection agencies often add high interest charges and fees to consumers’ debts, an individual could end up paying more through repeated settlements than he would if he had merely paid the debt in full to his original creditor.

A Collection Agency Must Prove That You Owe the Debt

The Fair Debt Collection Practices Act gives you the right to request proof that you owe any debt that a collection agency claims that you owe. There is no time limit within which a collection agency must provide a debt validation. Until it does, however, any further collection activity is legally prohibited. This includes reporting the debt to the credit bureaus or selling the debt to another company.

The collection agency is likely to mail you a computer printout that claims you owe the debt. This is usually considered sufficient to satisfy the conditions for validation. If you are considering a debt settlement to avoid a lawsuit, however, you should know that a computer printout from a collection agency is unlikely to be considered legitimate proof of a debt in court. Rule 103 of the Federal Rules of Evidence stipulates that only copies of original documents can prove the legitimacy of a written claim. In short, the collection agency must possess a copy of the contract you signed with the original creditor before the debt will be considered legitimate in court.

A Verbal Settlement Offer is Not Valid

Speaking to a debt collector on the telephone and agreeing to a verbal settlement offer may seem reasonable, but it is likely to come with a rather nasty surprise. Unless you have your settlement offer in writing, it isn’t legally binding. Thus, you can agree to a debt settlement over the telephone, pay the amount you agreed to, and then discover that the collection agency claims to have no knowledge whatsoever of the settlement and is still demanding the full amount.

You can negotiate the amount of the debt, the repayment schedule, and even how the debt appears on your credit report, but don’t expect any verbal agreements you make to be honored by the company later on. Make sure that you have all of the terms of your settlement offer sent to you in writing before you agree to make any payments toward the debt.

Settling a debt with a collection agency may be a good idea if you are financially able to pay it. It is important to understand the potential dangers of settling a collection account before you begin. By being aware of what can occur, you can protect yourself more efficiently. Ask that the collection agency provide you with a settlement offer that states the unpaid balance will not be sold and that, once paid, the account will be removed from your credit report. This allows you to pay off your old debt with the knowledge that doing so will improve your credit and that you will not be contacted over the same debt again in the future. Contact us at Debt Fix to learn more.