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When a creditor gives up on collecting a debt, the debt is then sold to a collections agency and reported as a loss on the lender’s income taxes. Once the creditor passes the debt on to a collections agency, debtors often become unclear as to which party they should negotiate with and pay: the original creditor or the collections agency. In almost all cases, the debtor should negotiate with the collections agency because the original lender/borrower relationship ends once the debt is referred for collections. However, there are a few exceptions to this rule. We’ll explore this issue in more depth in what follows.
Understanding a Collections Referral
In order to write off an unpaid debt as a loss, creditors will sell the debt to a collections agency for a discounted price. If you try to negotiate with or pay your original creditor after this point, they are unlikely to accept because the debt is no longer their responsibility. If your original lender accepted partial repayment of the debt you owe, this would change their tax liability and mitigate the loss they’ve already claimed. For this reason, most creditors will refuse to negotiate with borrowers after the debt has been sold to a collections agency.
When to Contact the Original Lender
You should only contact your original lender under two circumstances after an account has been referred to collections. First, you can contact your original creditor to find out who now owns the debt. In most cases, the creditor will give you the name and contact information of an outside collections agency. Secondly, you should deal with your original creditor if your debt was referred to an in-house collections agency. That is, if the collections agency is part of your original lender, then you can negotiate and pay your original lender.
Negotiation Tips
When negotiating with a collections agency, you can usually arrange for the negative information regarding the account to be taken off your credit report if you make a payment. Some collections agencies may require you to pay in full before they will agree to remove the delinquent item from your report. Remember to get the terms of your agreement and any promises in writing, especially where it concerns your credit report. During the negotiations, try to find out the collection agency’s bare minimum that they will accept. Don’t ask this question outright; only state what you can afford to pay. It’s not unheard of for collections agencies to accept 50%-70% of the full debt.
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