by: Edward Jamison, Esq.
All collection agencies and creditors will settle for less than the full balance, except collections on student loans and unpaid child support, which must be paid in full due to government regulation imposed on the collecting authority. With the right person negotiating the debt, a good settlement can be obtained at 35 to 65 cents on the dollar on the balance owed depending on the company and their policies. But remember, any collection or charge-off that is paid or settled WILL NOT get deleted from the credit report by simply paying it; the account will only get updated as being paid or settled on the credit report and remain there for seven years from the time since the last time a payment was made before it went to collection or charge off ( Not 7 years from the time the person pays or settles the account, which many people falsely assume ) So now the question is; WHAT SHOULD YOU PAY TO SETTLE THE ACCOUNT? I always start answering this question by saying a client should be willing to pay 100 cents on the dollar if they are able to get the collection agency to agree to delete the account with payment in full. Although this is very hard to accomplish, it is possible.
To do this the company usually wants payment in full if they are going to delete also. ( carrot on the end of the stick mentality ) If the client can afford to pay the particular account in full with a deletion then it is optimal because every removal counts when dealing with the credit score and the more points the better. I think that gaining a few extra points is worth the extra money spent since a few points can mean thousands in future interest savings on a loan. But the client can only do what they can afford to do. This deletion with payment theory only works with collection agencies and not charge-offs with credit card companies. It is almost impossible to get a deletion with payment from a credit card company because they never agree unless there is a very good reason, which is usually not the case for clients in most situations.
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On a side note, I do not suggest paying a collection in full even with an agreement to delete if the collection is over $2000. I only recommend paying in full with a deletion if the total debt is under $2000, unless the client has tons of money, which is usually not the case if they have unpaid collections. The reason it is important to pay or settle unpaid collections, is because the collection agencies usually sell the collection to other collection agencies in the future when the debt REMAINS unpaid. Worse yet, they may even sue you and get a judgment against you which will hurt your credit even more. That is why it is a good idea to settle collections if you have the money available. Here is my synopsis of when you should or should not settle these debts:
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CREDIT CARD CHARGE OFF
Always try to settle for pennies on the dollar because deletion is nearly impossible with payment, even if paying in full. A settled account with a zero balance is not worse than a paid in full charge off for credit scoring purposes, which is why it is never a good idea to pay extra and settle it in full.
COLLECTION ACCOUNT UNDER $2000
Try to offer payment in full if the collection agency agrees to delete with payment. If the collection agency says no then I would suggest switching gears and try to get the best settlement possible because a paid in full collection or a settled collection are pretty much the same for the credit scoring effect.
COLLECTION ACCOUNTS OVER $2000
Try to settle for pennies on the dollar because the benefit of deletion may not be worth paying the extra money; UNLESS of course the client has lots of money to spare.
UNPAID COLLECTIONS AND CHARGE-OFFS, NO MATTER WHAT AMOUNT THAT HAS BEEN OUTSTANDING FOR LONGER THAN FOUR YEARS, SHOULD NOT BE PAID OR SETTLED EXCEPT IN CERTAIN CIRCUMSTANCES
First-off, these accounts are 4 years or older and do not have a big effect on the credit score since they are old. Second, when you pay a collection or a charge-off sometimes your credit score will go down 10 to 20 points because the credit bureaus change the date of recent activity from 4 years ago to the present; which the Credit Scoring Software interprets as recent collection or charge-off activity, even though all you did was pay it.
YOU MAY BE THINKING "IF THAT’S THE CASE, WHY SHOULD I PAY ANY COLLECTION, EVER?
Answer: If you don't pay the collection you run the risk of getting sued if it is less than four years and also run the risk of the collection being sold several times which pollutes your report with negative collection accounts. But after the account is passed four years you no longer run the risk of being sued and collection agencies tend to not sell the debt as much after four years because they realize that their chances of collecting are slim which makes the debt worth very little on the consumer debt market. I would not pay these unless the company agrees to delete because most states have a four year or less statute of limitations to sue on unpaid contractual obligations ( check with your particular State to make sure the exact time for your State ); BUT BE CAREFUL, if you make even a $1 payment at any time before the four years passes, you re-toll the statute of limitations and the four year rule starts all over again.
NEVER make a payment or agree to any new terms unless you are planning on paying in full, because if you do you will start the 4 year clock all over again. One of the big credit card providers ( name withheld, refer to as Company X ) is famous for duping people on this very issue. Company X buys debts from other companies that are past the four year rule and then they send the debtor a credit offer for $100 more than what they owe the previous company.
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For example, John owes Providian $8000 and has not made a payment in over 4 years. Company X buys the debt from Providian for 10 cents or less on the dollar and sends John a Company X credit card offer with an $8100 limit, provided he agree to include the Providian debt in the balance of the card Company X of course fails to point out that John is re-tolling the 4 year statute and just tries to make John focus on the big $8100 credit card limit. John signs the offer and mails it back to Company X who in turn has the right to collect and sue John for the $8000 from Providian; worse yet, they have four more years to do it. Once John realizes he can only spend $100 on the credit card before it is maxed, it is too late. John gets mad and doesn't pay Company X as a matter of principle and Company X in turn sues him and garnishes his wages after they get a judgment. BUYER BEWARE, this is extremely unfair, but at the same time legal. I think Company X could be challenged on this on a theory of Unfair Business Practices or False Advertising, but it would be an uphill battle which should be avoided if possible.
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Edward Jamison is a Consumer Credit Attorney in Los Angeles and President of Jamison Law Group, P.C. His firm specializes in helping client’s restore their credit rating and increase their credit score to help them get a loan. You can email Edward at Edward@jamisonlawgroup.com , visit his website at www.jamisonlawgroup.com or call his firm at 888-869-4786.
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