Do collection agencies settle for LESS?

Do Collection Agencies Settle for Less?

When debts fail to pay, creditors often turn to collection agencies to recover their losses. But what exactly do these agencies do, and how do they handle settlements? Do they truly do their best to recover the original amount owed, or do they settle for less? In this article, we’ll delve into the world of collection agencies and explore the truth behind their negotiation strategies.

What do collection agencies do?

Collection agencies, also known as debt collection agencies, are companies that are hired by creditors to recover debts that have gone unpaid. Their primary goal is to communicate with the debtor, negotiate a settlement, and recover as much of the original debt as possible. There are two main types of collection agencies: in-house and third-party.

In-house collection agencies: These are departments within a company that handle debt collection internally. For instance, a bank might have an in-house collection department to recover debts from its own customers.

Third-party collection agencies: These are external companies that specialize in debt collection and are hired by creditors to recover debts on their behalf.

How do collection agencies work?

When a creditor hires a collection agency, the agency typically begins by sending letters, making phone calls, and communicating with the debtor to establish the amount owed and the reasons for non-payment. The agency’s primary objective is to negotiate a settlement, which can take various forms, such as:

Payment plans: The debtor agrees to make regular payments over a set period.

Cash settlements: The debtor pays a lump sum to settle the debt in full.

Discounted settlements: The debtor agrees to pay a reduced amount, often due to financial hardship or other circumstances.

Do collection agencies settle for less?

The short answer is: yes, collection agencies often settle for less. According to the American Collectors Association (ACA), 75% of debts are settled for less than the original amount. There are several reasons for this:

Economies of scale: Large collection agencies can negotiate bulk settlements at a lower price, which can lead to a higher recovery rate.

Market forces: The real value of the debt may have decreased over time, making it more likely that the agency will settle for less.

Debtor’s financial situation: If a debtor is experiencing financial hardship, the agency may need to settle for less to avoid writing off the debt altogether.

Risk management: Agencies may settle for less to avoid the risk of the debt becoming non-collectable or being written off.

What do collection agencies look for when negotiating settlements?

When negotiating settlements, collection agencies typically consider the following factors:

Debtor’s financial information: Income, expenses, assets, and liabilities are all taken into account to determine the debtor’s ability to pay.

Payment history: The debtor’s payment history, including missed payments and late fees, can impact the settlement amount.

Original debt terms: The original loan agreement, including the interest rate, fees, and late payment penalties, can influence the settlement amount.

Collection costs: The agency’s own costs, including expenses and legal fees, are factored into the settlement negotiations.

What are the benefits of settling with a collection agency?

Settling with a collection agency can have several benefits, including:

Avoiding costly litigation: Legal action can be expensive and time-consuming, and settlements can be a more cost-effective option.

Improved credit score: Settling debts can help maintain a better credit score, as the debt is no longer considered "charged off" or "written off".

Reduced stress: Settling with an agency can eliminate the anxiety of dealing with ongoing debt collection calls and letters.

Conclusion

Collection agencies do indeed settle for less, but it’s often necessary to ensure a reasonable return on investment (ROI). By understanding the factors that influence settlement negotiations, creditors can make informed decisions about their debt recovery strategies. Whether it’s a large corporation or an individual, settling with a collection agency can be a viable option for recovering debts and avoiding more costly methods.

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