How To Settle Debt For Pennies On The Dollar

how to settle debt for pennies on the dollar

Avoiding credit card use is nearly impossible in today’s world. But, whether you need to make a large purchase or an emergency pops up, credit cards are there to offer you a quick solution.

Unfortunately, it might also be impossible to pay off the amount owed. Debt can keep piling up, and it may seem like it will just stick with you forever. But that doesn’t have to be the case.

Let’s say you owe $1,000 to your credit card bills. After a long enough time passes without payment, the credit card issuer will sell your debt, and thousands of other old debts, to a debt buyer. The debt buyer will pay only pennies on the dollar.

If they can pay only pennies, there is no reason that they shouldn’t either.

Read on to learn how you too, can settle debt for pennies on the dollar.


Who Are Debt Buyers?

Before we get started, let’s better understand the players.

Debt buyers –a debt collection agency – are the ones who buy a bundle of debt from credit card companies or original creditor. Also known as junk debt buyers, the debt collection agency will have purchased a portfolio of different type of debt from the original credit card company. If an account is in debt and severely past due, the financial institution will not want to waste time trying to collect the money on a delinquent account.

The credit card company will lump debts together and sell them to the debt collection agency with the highest bid for pennies on the dollar. And when we say pennies on the dollar, we mean it.

Debt collection agencies buy the debt for 0.10 cents on the dollar or as little as 0.02 cents.

The length of the debt determines the amount that the debt collector purchases the debt for. Recent debts cost more, but as older debts have a smaller chance of being paid off, they can be sold for mere pennies.

This third-party debt collection agency is now the primary pursuant and will chase the payment that the credit card company couldn’t get paid. They are aggressive and unpleasant to work with, but knowing how the debt collection process works will prepare you to advocate for yourself and advocate well.

While credit card debts are most common, debt buyers will also purchase medical bills, auto loans, mortgage, and utility debts.


Statute of Limitation on Unpaid Debts

Before making any debt payment, check out your state’s statute of limitations. Every state limits how long a debt can be sued for. Once that limit is hit, you can no longer be sued for any amount of debt still owed.

The debt collection agency can still contact you through phone calls and harass you for the payment, but no legal action can be taken to collect the money.

Once the statute of limitations hits, the ball is officially in your court. The debt collector can no longer threaten legal action, which means you have more negotiating power to settle on a debt payment amount. Of course, you could consider leaving the debt unpaid without the threat of legal action.

Research your state’s statute of limitations to know precisely when the debt collection agency’s threats turn into bluffs.


Negotiate the Entire Debt

Okay, we know who is chasing the money and that there is a limitation on the timeframe the debtor can be sued.

Now it’s time to learn how to negotiate the amount of debt owed.

But before we get there, it’s important to note that not all debts can be negotiated. There are two types of debt: secured debt and unsecured debt. Only unsecured debts – debts that a guarantor does not back – can be negotiated.

If your debt is through a credit card or medical or utility bills, you can negotiate to pay back the debt for pennies on the dollar. Those with secured debt have to pay the owed amount.

When negotiating the amount of debt owed, it’s incredibly important to negotiate the entire debt balance in full.

If you don’t, the debt collection agency could settle for less but then hire a different debt collector to secure the difference. You don’t want this to happen – when you send a debt collection agency any amount of money, you want to be sure you won’t be swindled or tricked into continuing the debt collection process.

Another important thing to note for debt negotiation: Don’t send any money until you receive written confirmation that the amount of debt you’ve agreed to pay is the full amount and that the amount of debt paid will absolve you of any legal obligations for that debt, whether right now or in the future.

Depending on your financial situation, it’s good to note that it’s best to pay the debt one lump sum payment. If you make monthly payments to a debt collection agency, they can tack on extra interest or handling fees. Even if you make multiple payments, the added fees might total to even more than the amount you’ve paid. You don’t want to get stuck in this cycle of debt payment.

In some cases, payment of a debt restarts the statute of limitations, meaning there is a legal chance that you can be sued for payment on the debt owed. If you pay the debt in one lump sum, there would not be multiple fees added.


How Do Debt Collectors Make Money?

Debt collectors have just bought an entire portfolio worth of debt – they want to close their account as badly as you want to close yours. They paid pennies on the dollar for these debts – for every dollar of debt you owe, they paid at most 0.10 cents.

If they paid 0.10 cents on the dollar, and you offer 0.20 cents on the dollar, then they have still made a profit from your debt.

When negotiating your debt settlement, offer to pay a low amount on the dollar. They want to make money as quickly as possible, so the best option is to offer the debt collector one lump-sum payment.


Negotiate Deletion From The Credit Report

Owing money to a debt collection agency doesn’t just open up doors to harassment: it also negatively impacts your credit score. Even though the account is settled, that blemish can remain on your credit report and continue to negatively impact your credit score as they have been previously reported to the credit bureaus.

The FICO credit score is determined by predicting the likelihood of whether or not a consumer will make future payments on time. Damage to your credit is done on the first instance of a missed payment. Unless you can get the debt deleted from your credit report, even paying the debt in a lump sum does not take away the fact that the payments were missed in the first place, and your credit will remain negatively impacted.

Rather than simply settling the debt for pennies on the dollar, also negotiate your crediting rating with your debt collector to have it “paid as agreed” once the agreed-upon amount is paid. If you can arrange the deletion of the debt from your credit report, it’s a good way to get your credit-building process started again.

Another reason to negotiate the debt to have it “paid as agreed” is that it may be hard to secure future credit cards or bank loans with outstanding collection accounts popping up on your credit reports. In addition, some employers might not hire for certain positions if there are unpaid debts on your credit report.

Having a good credit score is an important part of your financial health, so it is essential to do everything possible to maintain good credit.


Get Any Agreement in Writing

If there is one takeaway on how to settle your debt for pennies on the dollar, it’s that any debt payment agreement must be secured in writing.

Never under any circumstances make any debt payments to collection agencies without having the terms in writing.

If at all possible, conduct all debt payment communications through writing so there is a trail that can be referenced.

Keep records of any and all correspondence between yourself and the debt collectors. They want as much money as possible, and these collectors are not above backing out on verbal agreements.

Take it a step further and send all debt correspondence through registered mail. This will track the document so you can be assured that the debt collectors did in fact, receive what you say they did. Request a receipt so you have proof of sending.

If you do have to speak with the debt collectors over the phone, get the name of who you are talking to as well as the name of their supervisor. Be sure to follow up all phone correspondence with a written letter for an added layer of security. Your debt and credit is on the line – be as thorough as possible.


Do Not Provide Any Financial Information

Don’t reference your financial information, and do not make reference to any reasons for paying off the debt.

If you want to have any power when negotiating, the debt collection agency has to know as little as possible about your financial information.

Never let the debt collectors know where money is coming from or how much money there is. Never let debt collectors know about any source of income, not even tax returns or money from relatives. Finally, and most importantly, never let the debt collection agency know your bank account information or debit card numbers.

To make any debt payments to collectors, use a cashier’s check or money order. To throw the debt collection agency off your back, use a bank with which you don’t have an account.


IRS 1099C Notice

If you are able to settle your debt for pennies on the dollar, you will receive a 1099C notice.

This is a “cancellation of debt” tax notice from the IRS. The IRS considers any forgiven or canceled debt to be income. If a debt collector agrees to receive at least $600 less than the original owed debt amount, they must file these forms and send the debtors a notice.

If your debt has been transferred multiple times, you may not receive a notice. Before sending any payments, ask your debt collector about the 1099C form.


Wrapping It Up

It is entirely possible to settle your debt for pennies on the dollar. So if the debt collectors can buy it for less than a dollar, why can’t you pay less?

Protect both your money and your credit – negotiate for a lower payment and for the settlement to be erased from your credit report.

Try and negotiate a settlement offer with a lump payment instead of a payment plan. Smaller payments will include late fees and an interest rate.

Never share your financial and account information with collectors.

The debt collection process doesn’t have to be intimidating. You know how collectors operate, so use that information to settle the debt for pennies on the dollar.


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