Pay for Delete - A Powerful Method for Removing Collections From Your Credit Report
If you have some cash, this is the easiest technique to use when cleaning up collections off of your credit report. The concept is simple: for small collections (under $500) you agree to pay them the entire amount, netting them a handsome profit, and you get the account deleted from your credit report, netting you a handsome increase in your credit score. Even if you are strapped for cash, most people can afford to pay $500 to a collection agency. If it's over $500, I still think this is an excellent technique. For debts over $500, I suggest paying a maximum of 25% of the total.
At 25%, the collection agency is still making a handsome profit. To give you some background, most bad debt companies pay or receive literally pennies on the dollar for the debts on which they are trying to collect. The amount that companies pay for bad debt depends on the type of account and its age: *
- Debts that have recently been charged off: 6 to 7 cents on the dollar.
- Accounts that are slightly older and on which a collection agency or two has already taken a whack: 1.5 cents to 2 cents on the dollar.
- Years-old, out-of-statute debts: A penny or less.
* Source: Sean McVity, portfolio broker at Keefe, Bruyette & Woods.
With this in mind, you should always start your offer at 25% or less. Let's understand the math here. If your debt is $1000, let's say at the most, the collection agencies has paid or will collect 7 cents on the dollar, or $70. If you offer them $250 (25%), they are still making a profit of $180. Remember, the credit card companies are out of the picture at this point. This money goes directly to the collection agencies.
The technique:
- Write the collection agency and offer to pay the amount in full (or at whatever amount you feel you can sell them on) in return for removing the collection account. Points to note in the letter:
- Mention the fact that they have not given you any kind of documentation on the debt, validating it is yours or that they are legally entitled to collect the debt.
- Tell them that you prefer just to pay this debt rather than hire an expensive attorney to sue them in court.
- Present your offer as a business deal - remind them of the handsome profit they are about to make on this deal by accepting your offer.
- Attach a settlement offer.
- Wait until you receive a signed, written acceptance of your offer from the collection agency.
- Once you have a written, signed agreement (a fax is fine), send the collection agency a money order or cashier's check for the amount you agreed to pay them.
For more advice, here is a link to our debt settlement techniques.
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