Most people know that they are in debt – and how long they’ve missed payments – so it’s rarely a surprise when debt collectors show up and demand that you repay the people you owe (your creditors).
However, while it can be worrying to know your creditor has taken further action against you, it’s possible to work with the debt collectors to come to a mutually beneficial agreement over how to deal with what you owe.
This article will cover everything you need to know about the debt settlement process, from how to respond to a debt collector when they contact you to what you should do if your payment offer has been rejected.
What is a debt collection agency?
Before delving into how to settle your debt, it’s important you know exactly what a debt collection agency is and how they typically operate.
Put simply, a debt collection agency is a company that aims to collect delinquent debts. They are hired by creditors directly to collect debts they are owed – usually after several months of missed payments and failed attempts at reaching an agreement over the debt.
They usually operate in one of two ways: acting as an intermediary to recover the debt and being paid a set percentage of the total recovered (called a first-party debt collector) or purchasing the debt at a discounted rate and retaining the full amount collected (called a third-party debt collector).
Though they carry out similar roles, a debt collection agency is not the same as a debt settlement company.
The main difference between debt collection agencies and debt settlement companies is that debt collectors take on the role of recovering the debt on behalf of your creditor while debt settlement companies negotiate with your creditors to reduce the debt to an amount you can more easily afford.
How much debt do you have?
Is a debt collector the same as a bailiff?
Both debt collectors and bailiffs carry out key roles within the debt recovery process, but it’s important to note that they are not the same and there are quite a few differences between them.
For example, debt collectors don’t have any legal powers to collect a debt and can only ask you to pay what you owe while bailiffs work on behalf of the court and can take legal action against you to force you to hand over payment.
This means that, while a debt collector might contact you numerous times to try to get you to repay your debt, they’re not legally allowed to enter your home or seize your belongings in the same way that a bailiff can. In other words, the end goal of a debt collector and a bailiff might be the same, but the way in which they’re legally allowed to go about it is quite different.
A debt collection agency has contacted me. What should I do?
Being contacted by a debt collection agency can be scary, and it’s normal to worry about how you should respond.
However, there are certain steps you can take to ensure you’ve handled the situation in the best possible way:
Know your rights
Before responding to a debt collection agency, you must know your rights.
Some debt collectors employ intimidation tactics in an attempt to trick you into making a payment you can’t afford – even if you don’t owe the debt.
Others might claim you took too long to respond, but you should always be given at least 14 days to submit your response.
Confirm you owe the debt
The next thing you must do when you’re contacted by a debt collection agency is use the opportunity to find out as much as you can about the debt.
This will help you determine if the debt is legitimate and, more importantly, if it’s yours to pay.
When a debt collector contacts you, they are legally required to provide you with sufficient information about the debt to help you identify it, including the name of your creditor, how much you owe, and how to dispute the debt.
Act quickly
Whether you’ve confirmed that you owe the debt or the money isn’t yours to pay, it’s important to act quickly. Remember, from the day you receive a debt collection letter, you should aim to submit a response within 14 days.
For example, if you owe the debt, you must decide how you want to deal with it (e.g. through a lump sum payment or in regular instalments) and how much you’re willing to pay.
Most debt collectors will be willing to come to an agreement with you if it means they’ll recover some of the money owed as opposed to nothing.
However, if you don’t owe the debt or need further information, you must contact the debt collector and explain your circumstances as soon as possible.
How to negotiate debt settlement with collection agency
If you’ve confirmed you owe the debt and are happy to make a reasonable offer of payment, there are certain steps you should follow to negotiate with the debt collection agency. We’ve outlined them below:
Determine what you can afford to pay
Before pulling an offer of payment out of thin air or blindly agreeing to pay an amount suggested by the debt collector, you must carry out a thorough review of your finances.
This can give you a clear picture of your financial situation, including your monthly income, outgoings, and debts, and allow you to propose a repayment figure that you’ll be able to comfortably afford on a regular basis going forward.
It can also prevent a situation where you’re unable to afford your repayments and end up in a worse financial situation than you were when the debt collector originally contacted you.
Offer to settle debt
Once you know how much you can afford to pay towards the debt, you must get in touch with the debt collector to inform them of your circumstances and how you’re willing to deal with the debt.
Most people who are visited by debt collectors get into this situation because they’re not in a position to repay the debt in full (called a full and final settlement or final settlement offer). Therefore, it might make the most financial sense to ask if you can repay less than you owe or negotiate a payment plan that allows you to make small contributions to the debt over a prolonged period (called a partial settlement).
This is likely to be the best option for both parties as it reduces the chance of you missing payments and ensures your creditors are being repaid what they’re owed over time in fixed instalments.
Get your agreement in writing
Regardless of how you’ve agreed to deal with the debt, it’s crucial you get it in writing. In the same way that you wouldn’t take out a loan or buy a car without a written agreement, the same goes for agreements with debt collectors.
If the debt collector is legitimate, they should have no problem giving you a written agreement, confirming the details of the payment schedule decided.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
What rules do debt collectors have to follow?
There are certain rules debt collectors must follow when they visit you to collect a debt, including:
Fair treatment
When a debt collector visits you, they must adhere to fair debt collection practices by not using harassing or intimidating language when communicating with you. They must also avoid using manipulation tactics to try and coerce you into paying more than you can afford.
False claims
Some debt collectors will try to exaggerate their legal powers by claiming to be a court official or bailiff to make you think your only options are to pay the debt immediately or face further action. Remember, a debt collector has no more legal power than a creditor and can only ask you to pay what you owe.
Excessive charges
Generally, debt collectors shouldn’t add excessive fees or charges to the debt unless the original credit agreement allows it – especially if you have proven that you’re experiencing financial hardship and are not in a position to pay anything towards what you owe.
My payment offer has been refused. What now?
Negotiating with debt collectors can be a time-consuming and stressful process, but its important not to give up at the first hurdle as there are still things you can do to ensure your offer is accepted and you achieve debt relief.
Firstly, talk to your creditor and ask if they will accept the payment offer instead to settle the debt quicker. If they’re happy with how much you’ve proposed, they will cancel the debt collection process and set up a repayment plan with you.
However, if your creditor also refuses your payment offer, it’s important that you still pay what you can towards the debt. In the event you’re taken to court down the line, this can help prove that you tried to pay something towards your outstanding balance.
Never let debt collectors or creditors persuade you to pay more than you can afford. This might result in them recovering the debt quicker, but it could lead to you falling behind on your rent or bills and accruing further debt.
Will debt collection affect my credit score?
If your debt has been passed to a debt collection company, it’s because you’ve missed several payments on the debt and your creditor wants to recover the money they are owed as soon as possible.
Generally, missed payments are added to your credit report after they have been past due for at least 30 days. This means that, if your debt has escalated to the debt collection stage, your credit file will already be affected.
Some credit reference agencies are also informed when a debt is passed to a debt collector, which will lower your credit score and make it difficult to access credit for several years. This will impact any future plans you have to buy a property, start a business or even open a bank account or take out a phone contract.
The purpose of a credit score is to give potential lenders a measure of your creditworthiness (how likely you are to make credit repayments in full and on time). If you have evidence of missed payments on your credit file, lenders will be less confident about entering into a credit agreement with you and might refuse your application.
What happens if I ignore a debt collection agency?
Because debt collectors don’t have any more legal powers than your creditors, it can be tempting to continue ignoring the debt. However, it’s not recommended to ignore a debt once it’s been passed to an external collection company.
Firstly, ignoring debt collection agencies won’t stop them from contacting you and will only make them more determined to recover the debt – especially if they’re only compensated if they successfully recover payment.
They could also start trying other ways of contacting you, such as repeatedly calling or visiting you until they get a response. This can cause considerable stress and make it difficult to focus on other things, such as your job and personal relationships.
Even if you know there’s no way you can afford the debt, making the debt collector aware of your circumstances and making an offer of payment – no matter how small – can show that despite experiencing financial hardship, you’re still determined to repay what you owe.
Conclusion
Being told that your debt has been passed to a debt collection company can be daunting and it’s normal to worry about what might happen next, but there is always room for negotiation if you can’t afford to repay the total amount owed.
Before making an offer of payment, you must review your financial situation and determine the maximum amount you’re in a position to pay back. Never feel pressured to pay more than you can comfortably afford as this can lead to further financial problems down the line.
Whatever you do, you must never ignore a debt collector. Some debt collectors are only paid once they recover full payment of the debt and will repeatedly contact you until you repay the debt in full or agree on a repayment plan.
