Administration costs on settling bad debts increases exponentially once they are sent to collection. Initially collection agencies insist on full compensation, but once the costs start adding up, they can quickly change their tune. The time and money required in pursuing payment quickly adds up and at some point it becomes counterproductive to pursue further recourse if they can just write it off. If your account has been sent to collection, this would a good time to negotiate a better settlement.

Collection agencies are often satisfied to settle your debt for whatever you can offer them. The reason being, they usually only get to keep a percentage of what's collected. To maximize their overall return, they need to collect as much as they can, as fast as they can. Since their motivation is to get matters settled as quickly as possible, negotiating a lump sum payment, rather than installments, will go over much better.

With these facts in mind, see if the collection agency would be willing to accept a lesser amount to settle your debt - offer about 40% of your original debt initially. While this is just a starting point and the collection agency will always try to get more, showing a willingness to negotiate should get you to a number somewhere in the middle. Your bargaining power is greatest when in negotiation, so include removal of the related negative data from your credit report in your negotiations, maybe offering a slightly higher payoff in exchange.

One caveat. Only offer to pay what you can actually afford whether it be all at once, or in installments. You want this matter to be finally laid to rest, without perpetuating further financial hardship. Also, never reveal the source of the payoff money. A collection agency that thinks you have access to more money, will push for a higher payoff amount.

Finally, get your agreement in writing. This includes a confirmation that any related negative data will be stricken from your credit report and your payment represents settlement of your entire debt. Unless told otherwise in writing, use a cashier's check or money order addressed to the collection agency for payment. If you must use cash, be sure to get get a signed receipt. Keep any related documentation for at least four years.

Knowing how collection agencies are motivated can put you in the driver's seat when trying to settle your debts. That knowledge and a little initiative can help you negotiate a debt settlement that's better than you expected. Effectively leveraging your bargaining power at the right time can benefit both your wallet and your credit score.