How to Handle Debt in Collections and Pay Less Than You Owe

Debt collectors often make an already stressful situation — feeling stalked by past debts — a lot worse if you give them the chance. They can be merciless, overbearing, and sometimes downright abusive when it comes to interacting with you about your financial history.

But you have rights, and you have options! Before hurriedly sending off a payment or giving them any more personal information, here’s what you need to know. Follow these steps so you can properly research, negotiate, and pay off a debt that’s in collections for far less than what they say you owe.

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In this article

    When You First Learn of a Debt in Collections

    Your first notification of a debt that’s gone into collection is usually a letter received in the mail. The document will have the debt collection company’s information on the letterhead, including their name, address, and phone number.

    In all likelihood, it will not be the same financial institution that originally issued your credit card or loan. In order to verify that the information is accurate — and that you do indeed owe this money to the company –here are the first steps you should take.

    Step 1: Don’t Stress

    It can be really confusing and scary to receive a threatening statement in the mail, especially from an unknown company, saying your debt has gone into collections. But do your best not to get stressed out about it.

    That doesn’t mean you can forget about it. Ignoring their calls or letters will just fuel their fire, giving them more leverage against you later. So, take a deep breath, then calmly get started responding to the letter as soon as you can.

    Step 2: Verify the Creditor’s Information

    There are a lot of fake debt collectors out there, so the most important step is to verify this agency is a legitimate company. It can be hard to tell the difference — some fake statements will even include bits of your personal information, like your name or account number. But don’t be fooled.

    Do a quick online search to validate if the company’s website or phone number is correct. Upon locating a website, there’s a better chance they are for real. However, a more reliable method is to do a quick search with the Better Business Bureau.

    Just type in the company’s name in the search box along with your city and state. If the collections agency is accredited with the BBB, then they are legit. If they aren’t, proceed with caution.

    Step 3: Check Your Credit Report

    Now it’s time to figure out which financial institution previously owned your debt. Each of the three major credit reporting companies (Equifax, TransUnion, and Experian) are required to provide you with a free copy of your credit report once a year. Just go to to order a copy of your complete report.

    If you contact one of the three companies individually (or use any other credit monitoring service), they will likely charge you a fee and require a credit card number for a free trial in order to gain access to your report history. But you don’t need to do this. The Annual Credit Report website is authorized by the federal government to allow you access to your credit report for free.

    Once you securely input your information and sign up for a free account, check your past debts and see if any new inquiries have been applied to your account. Do you show any agencies reporting a collections on your report? Is there anything suspicious going on? Do the names and numbers make sense?

    Step 4: Validate Your Debt

    If you don’t see any corresponding collections reports or inquiries, you may need to do some additional digging. It could be a mix up, or a debt that doesn’t belong to you.

    This actually happened to me when my account was mistakenly merged with my sister’s (we have the exact same initials). I ended up with one of her debts on my credit report and had to dispute it as my responsibility. Even if the company is legitimate, the debt owed may not be.

    It’s difficult to know the original amount of the debt that was sold to the debt agency, and how much in fees or interest charges has been added since then. Many times the collection agency will show incorrect information or numbers for your account, so make sure you know how much the debt was originally and where it came from.

    Step 5: Call the Credit Agency

    Now that you’re comfortable with the numbers, and have an idea if this debt is yours or not, it’s time to contact the credit agency directly. Call the number on the letter and give them the creditor account number listed. Start asking questions, and find out who they purchased the debt from, and what the original balance was.

    Even better, if you contact them within five days of receiving the notice, ask them to send you information in writing that includes the:

    • Name of original creditor
    • Original account number
    • Amount of money owed

    If you don’t believe the debt is yours, you can dispute this by sending the collection agency a letter, within a 30-day timeframe, stating you don’t owe this amount and that they can no longer contact you. Send this letter to them via return receipt requested, and keep a copy of all correspondence for your records.

    For the purposes of this article, though, we will be discussing how to handle a debt in collections when you do actually owe the money.

    Negotiating a Lower Amount

    Debt collectors get paid when you give them money, so their main focus is to hound you and pressure you until you pay them. But don’t give up too easily! You have rights and they know this, which is why they tend to use scare tactics. They hope you’ll forget all common sense and pay them off to get rid of the hassle.

    However, you actually have the upper hand here. Since you’ve done your research, and you realize you do owe this debt, you know the facts and can leverage this to negotiate a payment plan.

    Use the Balance as a Starting Point

    In most cases, the collection agency has purchased your previously past-due debt at a reduced rate from the original creditor. It’s likely they have purchased the debt for pennies on the dollar, meaning if your original debt was $3,000, they only need a fraction of that money to make a profit on the transaction (which is why the letter you received from them might have had some sort of “pay this amount” discount).

    Start by offering them 10-15% of the amount they say you owe. Using our $3,000 debt example, you would start the negotiations at $300-$450.

    One ex-debt collector even confessed, “The debt balance is like a sticker price on a car — a starting point for negotiations.” And usually the current balance is a far cry from what the original figure was, due to interest charges and late fees. Remember, they paid pennies for this debt, so almost any amount they can get from you will be a profit.

    Stand Firm With Your Negotiations

    The final amount you pay will probably be closer to 30-40% of the balance, and it surely shouldn’t be anywhere near what they originally requested from you — that is, if you negotiate with them and stand firm.
    One of the reasons you should take the time to research the details up front is because you want to arm yourself with the facts before calling the collections agency. They will make things up, coerce you, and confuse you in order to pressure a payment out of you. But don’t let debt collection agencies push you around. You have rights!

    If they aren’t willing to budge, tell them you aren’t backing down and will just call back in a few days. To keep from losing out on your money, they will likely fold and accept an agreement.


    One thing to be aware of is that you may have to pay taxes on whatever amount of debt is forgiven, cancelled, or discharged during the debt collection negotiation process. This is called a Cancellation of Debt and may prompt a Form 1099-C at the end of the year, which will likely be sent from the debt collection agency. The cancelled amount must be reported as gross income unless you meet an exclusion or exception. This is something to discuss with a tax professional or accountant.

    Keep the Debt From Haunting You

    Once you’ve reached an final payment agreement on how much your settlement amount will be, you should send them funds in the form of either a money order or cashier’s check. NEVER give them access to your bank account directly, or send them a personal check. They may try to wipe out your account by authorizing a charge you didn’t agree to.

    In all of your dealings with the debt collections agency, you need to keep written records of everything that is discussed and agreed upon. Only pay the amount they send you in writing, once you’ve reached the final negotiation stage. Write down the times and dates of your phone calls, and keep all copies of statements, checks, and receipts during this process.

    Physical correspondence via snail mail is your best bet, although email conversations can also count as written documents. Print everything out and keep a hard copy safely stored away.

    There may come a time when a new collections agency will send you a statement confirming a balance due for the same debt (yes, this happens frequently), and if you saved the related documents, you can prove that it’s already been paid.

    Don’t Be Afraid to Report Them

    If you feel the collection agency treated you poorly, verbally abused you, or harassed you, they should be reported. Additionally, if you need protection or other help, contact an attorney, a consumer-protection agency, or the American Collectors Association and explain the situation.

    They will be able to help deal with the creditors and ensure you are no longer bothered or in danger. As a consumer you have rights when it comes to paying off a debt in collections, so keep this in mind.

    Follow the steps outlined here to properly take care of your past-due debts and put them behind you, and you won’t have to worry about the debt coming back to haunt you in the future.