Nobody wants to deal with a collections company, but it looks like some may be pulling out all the stops. A friend of mine was telling me about this debt that went into collections a while back and he was always getting hammered by the collection company to try and pay. After months of ignoring them it seemed like the calls were going to stop. That’s when he received a letter in the mail from them. What made this letter a little different is now they were basically offering him all sorts of expensive gifts if he would at least acknowledge and start making payments on the debt.
You’d think that a tactic like this would use a lot of off-brand and cheap stuff to try and lure people in, but you can view the online catalog to see just what kind of stuff is out there. There’s everything from jewelery, lawn mowers, furniture, to name brand HDTVs and iPods. This is obviously going to draw quite a few people with debts out of the woodwork.
But that’s not all. They actually provided three different payment options. The balance of the debt was around $2,000, but you could actually settle for less, and in one case, still get the gift.
Option 1: Settle the account for about $1,600 by making $100/month payments AND receive a gift from the catalog in the 100,000 point category. (most of the gifts in this category were valued around $200-$250).
Option 2: Settle the account for just about $1,200 by making $50/month payments.
Option 3: Pay the account in full by making $25/month payments.
As you can see, they make the first option look the best. You’re getting a few hundred dollars taken off the balance and receiving a nice gift and you only have to pay $100 a month. With option two you get a lower settlement amount, but no more gift. And finally, you have option three which is about worthless. For one, they aren’t settling for a lower amount and if you just make the $25 payment each month it would take you over six years to pay off the debt.
Good News / Bad News
If you’re someone who was thinking about paying the debt anyway and have just been looking for the right time or a little spare money to do so, this kind of deal might not be so bad if the debt is relatively small. You can likely settle for a lower amount and get a gift on the side. And if you were smart, you could take that iPod or whatever they send you and turn around and sell it so you could apply that money to the debt to get rid of it even faster.
The bad news is that if you’re already in collections, your credit is pretty much as damaged as it will get thanks to that account as it is. By making a payment to the creditor you’re acknowledging that debt and now they are going to really be on you. If you thought a collection agency was annoying and abusive before, wait until you make a payment or two and then stop making payments to them. Even worse, is if you were to pick a low monthly payment that dragged the repayment out into many years you would actually be making your credit worse by keeping the negative mark on your report longer than necessary.
Also, don’t be lured into payment just because someone is waving expensive electronics in your face. Once you begin making payments the debt collector knows you at least have some funds available to repay the debt. So, if you stop making payments you’re a prime suspect for them to get a judgment against. Then they can, and will get your money by garnishing your wages or seizing assets. And judgments may stay on your record in some states for up to 20 years! Keep in mind that a creditor can sue you even if you don’t make a payment, but if you start making payments and then stop, they know they have a far greater chance in recovering the funds from you over some deadbeat they have been contacting for a year and never saw a single penny from.
Not only that, but if you don’t fulfill your original agreement to get that prize they will likely tack on the amount of the gift to the outstanding balance, reneg on the settlement amount, or who knows what else. Most people aren’t going to be bothered to read the fine print so that “free” iPod could end up costing you thousands.
Stay Out of Debt and Improve Your Credit
While these collection companies may go to great lengths to recover just a fraction of the funds owed it’s important to try and avoid these situations to begin with. Some debt may be unavoidable due to circumstances out of your control, but in most cases it’s simply a result of spending too much and then being unable to make the payments. As a reminder, even if you do find yourself in debt trouble there are a few things to keep in mind. First, always pay your secured debts first. If you have a house, car, or other debt tied to an asset, those should come first. If you fail to make these payments the bank can take the asset. After taking care of your secured debts be sure you’re paying for the other necessities such as electricity, water, and food. It makes absolutely no sense to pay a credit card or debt collector if you can’t even keep your lights on or feed your family.
Finally, as you work through these payments you should begin taking steps to improve your credit score. Once the damage has been done and you are late on a payment or an account goes into collections, it’s there for seven years. Don’t think that just because you negotiate a deal with a collections agency or quickly pay off a once late credit card in full that the negative mark will go away. In most cases, it won’t. So, don’t fret over the past and begin making better decisions going forward. You can’t change the past, so don’t stress out about it and know that you can still take steps today that will lead to a better credit history tomorrow.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.