What lump sum should I offer to debt collectors to settle?
Like any other negotiation, you're better off to start low
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Ask a question.
'Opening Credits' stories
Dear Opening Credits,
I have $80,000 in private
student loan debt (from law school), not to mention another $100,000 in Stafford PLUS loans. I had trouble paying my loans two years back, and the private
lender wouldn't come up with a payment plan I could afford, so I defaulted. It
went into collections and has been for two years. I am still current on the
My father came into a lot of
money recently and is willing to buy out the defaulted private loan in one lump
sum in order to wipe it from my credit report. I know that collections agencies
can settle loans paid in one lump sum for pennies on the dollar. What is a
reasonable one-time lump sum offer, including the requirement that they remove
it from my credit report? Obviously, it's negotiable, but what is the industry
standard? Would 30 cents on the dollar be a good offer? Where does one start in
negotiations like this? I know I need to get an attorney to represent me in the
negotiations, but I would like some industry standards to work from. If they
don't take a significant haircut, I have little incentive to settle it in a
lump sum. -- Adam
I think settling the
defaulted student loan is a fine idea and definitely worthy of a try. Your dad
is a gem to help you out.
However, hard numbers or
percentages don't exist because every collection agency has its own
policy. Still, there are some guidelines
I can share. Here's what you need to know and do.
That third-party company
bought the account for a fraction of its true worth, and ideally would like you to pay the full balance. The difference between their purchase price and the
amount you cough up is their profit margin. That purchase price, according to online debt auctions, can be as little as 2 cents to 4 cents of every dollar owed. Like any business, their aim is to
buy low and sell high.
There is a good
reason that a collector might agree to a lesser amount than is actually due. It's because the effort they put forth in getting you to pay is
eliminated when you just cut a check. All those phone calls, letters and
threats take time and energy, and their failure rate is high. By you sending at least a little more than what
they spent, they come out ahead and can turn their attention to other pesky
accounts in their system.
So how much is the perfect
amount to begin negotiations? A key but unknown (to you) factor is the sum the
collection agency paid for the account. If you had that information, you'd have
a clear place to start. Problem is, even if you asked, they wouldn't tell you.
So you have to guess, and it doesn't hurt to start low. Go ahead and offer 25
percent of the balance -- around $20,000. Explain that you are prepared to send
a money order immediately, as long as they sign an agreement that secures the
settlement. You don't need an attorney to draw up such a contract, but if you
don't mind shelling out a few bucks for one it doesn't hurt to do so.
The collector will either
jump on your proposal or reject it. If they say yes, send the agreement, have them
sign and return it and then shoot them the money. In the event of a denial,
increase your offer to a comfortable figure. With some back-and-forth
bargaining, you can probably come up with a deal that both you and the collector can
live with. But do keep in mind that they are under no obligation to accept
anything but the complete balance. The ball is in their court, not yours.
Know, too, that walking
away from a portion of your loan will save you some cash, but maybe not quite
as much as you think. The IRS considers forgiven debt as income, so a bigger
tax bill may be in your future.
As for your credit
report, you were delinquent on payments and the debt was sold to a collection
agency. Those are facts, and you can't have those notations removed before they
"age off" your credit report seven years after the original loan holder charged off the
account. Additionally, your reports will indicate that you've settled the
obligation, which doesn't look quite as wonderful as satisfying it in full.
From here on out, keep
your credit clean. Borrow prudently and pay according to the contract.
See related: 1099-C surprise: IRS tax follows canceled debt, Negotiating debt with original creditor vs. 3rd party collector
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: January 2, 2013
Three most recent Opening Credits stories: