Why Will a Creditor Settle?

If someone owed you a big chunk of money, your first inclination would be to get the entire loan repaid. But would you ever settle for less than 100 percent?

You might, if you thought it was the only way you were going to get any of your money back. You also might if you thought the person who owed you money didn’t have anything of any value that you—or he or she—could sell to come up with the money owed.

Your creditors think the same way. If they believe that there’s no point in taking you to court and getting a judgment against you because you don’t have any assets anyway, they’re more likely to settle.

And if they believe that you only have a small chunk of money, and you’re either going to give it to them or give it to one of your other creditors who is more inclined to negotiate a settlement, they too will become more inclined to settle.

Typically, the best deal you can get with a creditor or a collection agency is a 50 percent settlement— where you pay 50 cents on the dollar.

But if your account has gone to a second or even a third collection agency, there is a much lower expectation that you will actually make good on your debt. In that case, you may be able to negotiate a deal as low as 33 cents on the dollar.

Also, when negotiating your settlement, ask to have penalties and extra interest dropped. Most creditors will do this, as long as there’s a chance that they will recoup at least part of the original debt.

The longer a debt has been around, the more likely creditors are to settle. And the less eager you appear, the better your negotiating position. That’s why you never want to accept the first settlement offer. And you probably will not want to accept the second offer, either.

If the statute of limitations is going to expire soon, don’t be afraid to mention that during negotiations. It can tip the scales in your favor.

Don’t volunteer information. If the collector knows you need to clear up a debt in order to qualify for a loan for your dream home, you have virtually no chance of coming to a good settlement.

Some experts suggest that you threaten bankruptcy. If this is a debt that would be discharged under bankruptcy protection, then the creditor may be willing to settle—since getting something now is better than getting nothing later.

However, you must be careful when you threaten bankruptcy. If you rack up more debt on an account after you threaten bankruptcy, you may wind up unable to discharge this particular debt.

Next: Negotiating Your Score