Negotiating debt with original creditor vs. 3rd party collector

The rules and negotiating strategies differ between them

Opening Credits columnist Eric Sandberg
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

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Question for the expert

Dear Opening Credits,
Hello Erica. We are trying to stay afloat with our credit cards. Most of them have gone to collections and we have been trying to work out some type of payment plan on our reduced income budget and, of course, we are met with sarcasm and threats of litigation. We just want to work out a settlement and make payments on that. Can you help? -- Laura

Answer for the expert

Dear Laura,
Bailing water from sinking boat is exhausting, isn't it? So let's mend that hole and get your financial vessel really seaworthy!

You say that the accounts are all in collections, but it's not clear whether they're still with the original creditors or if they've been sold to third-party collectors. This is a necessary distinction for both resolution options and legal matters. Just who is in possession of the accounts is not always obvious, so call the number on the bills to find out if you're unsure.

Dealing with original creditors
Though your bills may no longer arrive with a friendly, "Hey, maybe you've forgotten about us, but we didn't receive a payment last month ..." note, there is a good chance your banks and retailers will still work with you. Why? They not only want to get paid, but one day you could be in a better position and once again be a desirable customer. Therefore, though they may not sound particularly cheerful, it's in their best interest to help you find a way to pay.

  • Resolution options. Original creditors are often reluctant to accept a payout of less than the amount you charged, so your best bet is to arrange a hardship plan. With it, you make lesser than normal payments until you get back on your feet. Begin a letter writing campaign: Send a brief explanation of your situation, an outline of your budget, supportive documentation and how much you can afford to pay with a check in that amount. Your offer may at first be rejected, but persist; reasonable proposals are usually accepted eventually. Another option is to contact an accredited credit counseling agency. A financial adviser will review your circumstances, and if it makes sense, will arrange a debt payment plan.
  • Legal matters. It's always a good idea to know your legal rights and responsibilities before dealing with those you owe. When a balance is with the original creditor, state law, rather then federal, applies regarding collection practices, so learn what yours are by viewing the state state-by-state listing of collections laws, statutes of limitations.  

Dealing with 3rd-party collectors
If your original creditors sold the accounts to third-party collection agencies, you'll be dealing with an entirely different type of company. These businesses purchase uncollectible accounts for a fraction of the amount owed, and then attempt to collect on the full balance. They make their money on the spread between what they buy the account for and how much the debtor pays. For example, if they purchased a $3,000 balance for $1,000 and collect in full, they make $2,000 -- a tidy profit.

  • Resolution options. Because the collection agency bought the debt at a discount, you may be able to negotiate a settlement as long as they make some money on the deal. Be aware that you'll need the total offer in cash. Collection agencies are not in revolving credit industry, so it's rare for them to accept small monthly payments, especially on a settled sum. However if the debt is large, offering to send the payments in two or three installments can't hurt. There are problems with settled debts, though. They don't reflect as well on your credit report as accounts paid in full, and there may be a tax consequence for the amount you walked away from. For this reason, you may choose instead to pay the total balance due, focusing on one and than moving to the next in systematic fashion.
  • Legal matters. Third-party collectors must comply with the federal Fair Debt Collection Practices Act.  There is nothing in this law that prohibits these collectors from making snide comments, but they are restricted from swearing and making idle threats. If they say they are going to sue you, then they must follow through.

While you're working on your debt issues, know that policies vary by company. Be flexible. You may encounter original creditors that are willing to settle for less than you owe but won't allow a hardship program, or collection agencies that refuse settlements but accept monthly payments.

As the boat's owner, Laura, your job is to locate the leak by knowing whom you owe, seal it well with a solution that satisfies both parties, and then closely monitor your repairs by maintaining creditor contact. Do so and you'll safely sail to a better financial future.

See related: Know your rights under the Fair Debt Collection Practices Act, State-by-state listing of collections laws, statutes of limitations,

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Updated: 11-21-2017