What is the lowest amount debt collectors will settle for? What experts say
Many Americans are struggling financially due to factors such as high inflation and correspondingly high interest rates, which increase the costs of financing. And, once you get into debt, it can be hard to get out, considering that you not only need to save up enough or divert money toward the initial amount owed but also need to pay interest on the balances you've been carrying.
Meanwhile, other essential bills, like housing and food, have increased recently due to inflation, causing some people to fall further behind on debt payments. For example, the number of credit card and auto loan delinquencies has been on the rise recently, according to the Federal Reserve Bank of New York.
When you stop paying your debts or don't follow the expected repayment schedule, you could face debt collection efforts, which, if ignored, could ultimately lead to issues like lawsuits and the seizure of your assets. The good news, however, is that if you have debts in collections, you can often settle with debt collectors for less than the full amount owed.
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What is the lowest amount debt collectors will settle for? What experts say
The short answer is that there's no universal settlement amount that debt collectors will accept. Every situation is unique. However, there are some factors that help dictate the lowest amount debt collectors will take as a settlement, including the following:
Who the debt collector is
Not all debt collectors are the same, and that can affect your debt settlement.
"Every creditor is different. Some creditors will accept pennies on the dollar, others will not settle for less than 80% in a lump sum payment," says Jessika Arce Graham, partner at Weiss Serota Helfman Cole + Bierman.
However, your odds of a lower settlement are better when the debt collector is a debt buyer, says Christopher E. Roberts, partner at Butsch Roberts & Associates LLC.
"Debt buyers are typically companies that purchase large amounts of delinquent debts from the creditor or another debt buyer," Roberts explains.
The reason why debt buyers often settle for less than what's owed on the debt is that they typically purchase debt for a fraction of the cost.
"Thus, if a debt buyer purchased a $1,000 debt for $30-$50, then a consumer may have more options to settle for significantly less than the full balance, as the debt buyer would stand to make a large profit in this scenario, even if they settled for $500," adds Roberts.
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Your repayment offer
How you go about trying to pay off your debt can also affect how low debt collectors will settle for.
"Creditors are more willing to accept an offer when there is cash up front over a payment plan," says Arce Graham.
That said, you want to be sure that you understand the fine print of any debt settlement offer you agree to, as you might not be as done with that debt as you assumed.
"Always be aware that making a payment will likely restart the statute of limitations for the debt to be pursued against you in court," says Roberts.
The validity of the debt
Just because you're dealing with debt collectors doesn't necessarily mean you owe the full amount they claim. And, in some cases, they might not be able to prove you owe that debt.
The Fair Debt Collection Practices Act (FDCPA) gives consumers the right to request validation of a debt and/or dispute the debt, explains Roberts. And depending on what the results are, that could affect your negotiations.
"If the validation shows that the debt is valid and the debt collector has their ducks in a row. then perhaps the consumer resolved the debt for a little more than if the debt collector's validation shows that the debt collector cannot substantiate the debt or that the consumer owes the amounts," says Roberts.
"In the latter scenario, perhaps the consumer has better leverage to not pay the debt or to pursue a case against the debt collector under the FDCPA," Roberts adds.
Ideally, though, you can verify debt before it ends up in collections. With medical debt, for example, you might request an itemized receipt to make sure you're being charged for the right medical services.
"A percentage of medical bills contain errors, so before a bill is sent to collections, it's important to look it over carefully and make sure it matches the care you received. If your employer offers care navigation, checking a bill for errors may be part of the services that are included," says Nick McLaughlin, strategic advisor at Emry Health.
Alternatives to settling with debt collectors
Settling with debt collectors isn't your only option for debt relief. In some cases, for example, you might find that it's better to use a debt relief service to negotiate for debt forgiveness on your behalf. Or if the debt collector is not budging, taking out a debt consolidation loan to pay off the existing debt and then having a more affordable monthly payment may work better for you.
Also, bankruptcy can be an option, although this can be a more involved process that hurts your credit even more. Still, it can be effective.
"If you are facing multiple creditors and you simply do not have enough money to resolve all of your debts, do not enter into a deal with just one if you will not be able to pay the others. At that point, perhaps bankruptcy is your best option," says Arce Graham.
The bottom line
Whether you're looking to lower your medical debt, gain credit card debt forgiveness, or handle many other types of debts, there's often room to negotiate. That's especially true for unsecured debt, where the creditor can't simply reclaim an asset to cover most of the debt. However, it's important to remember that debt settlement isn't a one-size-fits-all option. In some cases, you may want to consider consulting with a qualified expert, such as an attorney, to see which debt relief options work best for you.
