Making a settlement offer to a collection agency in writing: Considerations to make
I compare sending a letter to a debt collector offering a settlement to playing Poker with your cards face up on the table. In my opinion, the worst mistake you can make when negotiating with a debt collector is to make the first offer.
To put this information into context, in my prior life, I was one of the most successful debt collectors in the country.
Based on my experience, which is a combined 25 years on both sides of the fence (debt collection and debt settlement), settling debts with debt collectors is just like buying a used car.
Debt collectors want to settle just as bad as you do!
If you’re wanting to settle your debts, my best advice to you is to let the debt collectors “sell” you on the idea of a settlement.
Making the first offer would not be as big of a deal if collection agencies collected a high percentage of accounts. But, they don't. In fact, they collect very few.
Which is why settling your debts is even possible.
Debt settlements are a “tool” for debt collectors to convince more people to pay their bill. Just like free oil changes and a discounted price aid a used-car salesperson to sell more cars. Offering settlements permits debt collectors to collect more debts.
Here is why these dynamics exist...
Collection agencies generally collect 20% of the accounts they are attempting to collect...
On average, approximately 80% of accounts that enter collection are never collected. And the astonishing piece to that, is that it takes 7 years for them to collect the 20%.
If you drill down into this information a bit further and break it down by each month, debt collectors collect the full balance or a settlement on about 1-2 out of every 100 accounts that they are servicing on a monthly basis.
What’s even more astonishing, is this ratio diminishes as your accounts age and flow through the collection-cycle. The 1-2 per 100 accounts ratio is when your accounts are referred to a collection agency for the first time. When the accounts migrate to a second agency, the ratio is more likely to be 1 out of every 200 accounts. A third agency may only yield a ratio of 1 out of 300 or 400 accounts. If your accounts are 4-5 years old or older, the ratio could be 1 out of 500.
Debt collectors spend most of their day data-mining: analyzing credit reports, Google, social networks and Big Data, in an attempt to pinpoint the accounts that have the highest probability of yielding a payment-in-full or a settlement.
Mailing a letter offering a settlement clearly does their job for them. In my opinion, it’s no different than walking up to a used-car salesperson to tell them how bad you want to buy their car.
If the used-car salesperson is confident that you will buy their car, they will most often be less negotiable. If the debt collector knows that you want to settle your debt, they too will most often be less negotiable.
The 80% figure is consistent with the entire debt collection industry. Read it for yourself from the Consumer Financial Protection Bureau.
On the bottom of page 42 it states: "a recent survey found liquidation rates ranging from 12.0 to 28.8 percent depending on the type of debt being collected. ACA International, 2012 Agency Benchmarking Survey, at 21%."
On the bottom of page 43 it states: "The five publicly traded debt buyers’ portfolios appear to yield, on average, 17% of their purchase price five years after purchase."
Considerations collection agencies make when receiving a letter offering a settlement...
Generally speaking, when a debt collector receives a letter from you, the debt collector's first thought is that there are underlying motivations that prompted your written offer. Whether that be buying a home, gaining or maintaining security clearances, qualifying for an apartment, preparing to look for a job, applying for certain licenses, or that you just want to clean up your credit report.
Because of these collection ratios that I have shared with you, debt collectors must maximize their collection from consumers whom they believe will pay no matter what. If they feel that they stand in the way of something you want, they will most often be less negotiable. The last thing you want to do is build the debt collector's confidence.
When negotiating with a debt collector, it's okay to want to pay. However, you definitely don't want them to think that you have to.
Additionally, the letter will also commonly prompt the debt collector to research you and your situation so they may prepare for the negotiation. When otherwise, your account may just be lying dormant without any activity at all. Just like any other situation in life, you are better off if you are more prepared than your adversary.
Debt settlement letters do not permit you to take advantage of the debt collector's business model.
Debt collectors, just like used-car salespeople, have real-time access to decision makers. The collection agency business model, just like a car lot, is built around urgency.
When you send a settlement-offer letter to a debt collector, you aren't able to go back and forth and actually negotiate. Based on my experience, it's a very rare event when a debt collector accepts the initial offer.
When you negotiate verbally, you put yourself in a position to immediately shoot down any offers that are made by the debt collector, which, in turn, influences the debt collector to offer something better.
If the debt collector can get out of their chair, walk down their aisle of cubicles, and approach their manager with an offer, that offer is more likely to be accepted if the debt collector can advise their manager that they will be able to immediately collect the account after they fax, email, or mail you the offer in writing.
Taking advantage of this urgency isn't possible when you negotiate at a snail’s pace via a letter.
Make it their idea and run with it...
The approach that I recommend is to call them. By speaking over the phone, you have a platform to make settling their idea.
If settling is your goal, your objective is to run with their idea, once presented to you, by letting them know that you will look into it and that you will call them back to advise them of the outcome.
This is the perfect segue to initiate your negotiation while preserving the psychological advantages that you currently possess.
For more information about how to approach your situation, please see my article about how to talk to debt collectors.
Additionally, if you have multiple debts in collection, it's important for you to think about your situation as a whole. Please refer to my 4-part series on debt settlement to see if settling your debts even makes sense for your situation.
I hope this information about debt settlement letters helps you. Please feel free to contact me.