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Settling With a Collection Agency Can Be Dangerous

Updated on August 7, 2010

Settling with a collection agency may seem like a viable option if the debt collector offers you a good deal, you think you can afford it, and you just want the collection agency to stop harassing you over the unpaid debt. Unfortunately, many consumers have settled a debt with a collection agency only to find themselves with a brand new debt a few months later or worse - in court.

Settling With a Collection Agency Can Result in a Lawsuit

If the unpaid debt the debt collectors claim you owe is particularly old, there is a good chance that you aren’t legally liable for it anymore. This is because a debt collection statute of limitations exists for each state that regulates the amount of time a debt collector has to collect the debt from you. Granted, the statute of limitations only refers to the amount of time a collection agency has to sue you, but if the collection agency can’t sue you to collect the debt, the worst it can do is call you repeatedly and firing off a cease and desist letter takes care of that problem.

Settling a debt, however, resets the statute of limitations as soon as you make the very first payment. Thus, unless you intend to pay off the debt settlement in one lump sum, could put you in a precarious position if you lose your job or miss a payment. Should you be unable to pay, the collection agency will jump at the opportunity to drag you to court and garnish your wages.

A Collection Agency Has the Right to Sell Forgiven Debt

Let’s say the original debt you owed was a neat and tidy $500. Once the original creditor charged off the debt, the collection agency added its own fees and interest to bring the debt up to a whopping $800. If the collection agency offers you a debt settlement for $400, you think you’re getting a pretty good deal, right? But what happens to the remaining $400 that you owe? You assume its forgiven debt, but you assume wrong.

Unless you have a written agreement with the debt collector that stipulates otherwise, the collection agency is likely to sell the remaining unpaid debt to yet another collection agency. This will result in more calls from debt collectors, more demanding collection letters and yet another settlement offer. Just how many times do you intend to pay this debt anyway?

Your Credit Score Won’t Improve After Settling With a Collection Agency

Regardless of how much grief the collection agency gives you, the benefit to the whole shebang is that you can count on your credit score improving as soon as the debt is paid off. Uh-oh! Wrong again!

The collection account will appear on your credit report for seven years from the date that the original debt first went 6 months delinquent. As long as that collection account appears on your credit report, your credit score will suffer. Paying a collection account has no effect whatsoever on how the account is scored. In addition, future lenders won’t see a “settled” notation on the account as being positive - far from it. People who routinely settle their debts rather than paying them in full are a danger to lenders. 

What Do You Get Out of the Settlement?

You can make settling with a collection agency a positive experience by making a few demands up front.

  • Demand that the derogatory collection account be removed from your credit report as soon as the settlement is paid.
  • Demand that the collection agency agree not to sell any remaining balance.
  • Get a zero balance statement proving that you paid in full.

It is absolutely 100% imperative that you get all of your communication with a collection agency in writing and signed by a representative, if possible. By having documents in writing that protect you, you can settle with the collection agency, improve your credit and move on with your life.

Disclaimer: I am not an attorney and this is not to be taken as legal advice. See a licensed attorney in your state for guidance specific to your situation.


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    • CoralSea profile image

      Coral Sea Mercintile 3 years ago from Austrailia

      Very useful information about debt settlement with debt collection agency. When you are going to settle your debt, you should settle your debt with the creditor. If you settle a debt with a creditor for less than the full amount, or a creditor writes off a debt you owe, you may owe money to the IRS. The IRS treats the forgiven debt as income, on which you may owe income taxes.

    • profile image

      Lynn 4 years ago

      I made a settlement with a collection company.I thought that I was doing everything writing etc... Today, I received a letter from a new collection company for the balance. Can they do that?? My new amount is less the settlement..but still....

    • monicamelendez profile image

      monicamelendez 5 years ago from Salt Lake City

      Wow I had no idea that the debt could be sold to another collection agency. That should definitely not be legal. Thanks for some solid advice. I'm learning as much as I can about the debt collection process.

    • profile image

      matt 5 years ago

      once a collection letter is sent to you stating that your account is in seriuosly delinquent and it shows a past due amount is that the final amount to pay off cause i cosigned for a dumbass who is now running from the law.. just found out that payments weren't being made. i seen my credit report and it shows 1300 origonal amount is 15000

    • profile image

      Collection Company 5 years ago

      Commercial debt recovery should be in legalities and in a system.The collection agency, understands it best.The collection services procure bad debts & abide by the Fair Debt Collection Practices Act. Legal support to cases and quick response to the individual cases make the collection company a huge hit.

    • profile image

      Mike 5 years ago

      Hi, looks like we have an expert here. I have a situation that need your adv: I got a settlement of $4500 which I paid already $2000 of it. The debt collector always showed the original balance with interest; right now $32897. Yesterday, I got a letter from another debt collector who bought that acct from the original one but they were asking for the $32897 balance to be paid...Can they do that to me? I have 4 kids and I'm hardly making $3000/month. Pls adv. Thx

    • profile image

      Kevin 6 years ago

      Good info, thanks for taking the time to write it!

    • profile image

      Norma B 6 years ago

      Need advice. Made a bad deal on payment arrangement. Letter actually says that after the last payment there will be a balance due. I've already given the 1st payment. Call CA. They said there would just be a 6% interest accruing, but how do I beleive them. What if they add other charges?

    • profile image

      Transportation Collection Agency 7 years ago

      Always get things in writing. It may be dangerous to settle, but if you get everything in writing you are much better off.

      Thanks for the post.

    • Edward C. profile image

      Edward C. 7 years ago from Florida

      Thank you for the compliment. I've been in this business for longer than I care to think about. I'm actually a credit specialist and consumer advocate, but I love what I do. I've cost collection agencies thousands of dollars and because of that, I sleep well at night.

      Good luck with your accounts. If you need a hand with anything I'd be happy to put my two cents in. :)

    • SteveoMc profile image

      SteveoMc 7 years ago from Pacific NorthWest

      You may not be an attorney, but you seem to know a lot about credit and collections. I am struggling right now to get some accounts current. It is surprising what one little mistake snowballs to be. Although I am no fan of World of Warcraft, I do like GTA and I would love to have a cheap cookie right now.

      Thanks for the financial advice. I sure need some now.