How to Settle With a Debt Collector

By Brigitte Yuille • Bankrate.com


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That bill has been sitting at the bottom of your paperwork pile for a while, and despite your best effort, ignoring it hasn't made it go away.

Now you've acquired somebody who wants to be your new best friend, a debt collector.

You can't wait any longer to face it. In fact, many credit experts say too often consumers dodge the opportunity to resolve their money issues with the debt collector when they should.

"If you know you lost your job and you don't have the money to pay your creditors, don't be reactive, be proactive," says Robin Holland, spokeswoman for Equifax, a credit reporting agency.

But many people don't know what to do when it comes to working out a deal with a debt collector. The following questions could help.

True or false: An account sent to collection still can be deleted from your credit report. That's true. A deletion is possible, but that doesn't mean all creditors will agree to it, cautions consumer credit attorney Edward Jamison, of the Jamison Law Group P.C., in Los Angeles, which specializes in helping consumers get their credit ratings restored.

Even if the collection agency agrees to a deletion, it's only of limited value.

Maxine Sweet, spokeswoman for Experian, explains that if the deletion letter came from the collection agency, only the collection account would be removed. The original credit or account from the creditor would remain on the report.

"The original creditor can verify to us that the original debt was an error and should not have gone to collection and instruct us to remove both the original account and the collection account," Sweet says.

Jamison explains the creditor deletion gets rid of the account completely. This, in turn, "helps the credit score because it is like it never happened, where a paid collection means you were not creditworthy in the past."

He advises that if the consumer is able to get a deletion, have the letter faxed stating the terms. For instance, it could say: "I, ABC Collection, agree to delete John Doe's collection account with the account number 1854642 in return for John Doe paying X dollars." Make sure it's signed by someone at the company.

But, the consumer can't demand a deletion without reason, warns Pamela Baird, a collection attorney for Lacy Katzen LLP in Rochester, N.Y.

"If it's disputed and they investigate it and they find the debt has been reported in error or inaccurately, they delete it," she says. "They are telling the credit reporting agency they want that trade line taken off the consumer's credit report."

Craig Watts, public affairs manager at Fair Isaac Corp., believes some creditors don't often provide deletions because it can be deceptive.

"One of the main reasons lenders do business with credit bureaus is because lenders want a better view of the risk involved in extending credit to any individual," he says. "Deleting a collection account from a person's history is not in the best interest of the lender because such information is important to a fair assessment of the person's credit risk."

True or false: Paid-in-full collections are better than settled.
Depends on who you ask. If it's not possible to get the account removed from the report, Jamison suggests settling. He believes this move can prevent the resale of your debt, prevent a lawsuit and alleviate damage to your credit report and credit score.

Collection agencies will act as the middlemen during the deal, says Jill Jensen, director of Omnium Worldwide Inc., a collection agency. She says Omnium's clients, which include banks, credit card companies and phone companies, will define the parameters for settling.

"The client will have payment criteria, for instance, on when the account can be paid, what kind of terms can be offered and in what situations the agency can offer the settlement," she says.

For example, she says, a client may tell the debt collector, "The options we have are payment in full or no more than three payments spread over 90 days."

Jensen says the client will expect Omnium to gather enough information about the consumer to decide how much to deviate from the preferred payment in full.

"If the customers' financial situation is such that other terms might be appropriate, we would act as the conduit to the client and seek permission to set payment terms or settlement outside of that area."

If you choose to settle, do so for as little as possible, Jamison cautions.

"It's better to save 50 cents on the dollar and lose a couple points off your credit score by having a settlement as opposed to 'paid-in-full,' because the collection and the charge-off notation is what's hurting the account," he says.

Watts explains, "As far as the FICO credit risk score goes, the paid-in-full status is going to have little, if any, affect on the person's score."

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