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 usually paid on a percentage of what is collected, so while they want to maximize their return, they are often more than happy to settle on whatever you're willing to pay. Their primary objective is to get you to pay as much as possible as fast as possible to get the matter over with. For this reason, they are much more flexible when negotiating a lump sum payment, rather than drawn out installments.

When negotiating, always offer less than you owe initially, in the range of 40% is usually a good starting point. The collection agency will always try to get you to pay more, once you've expressed a willingness to settle, so starting lower will help you get to a happy medium. Prior to payment you have bargaining strength, so at this time also negotiate for the debt to be removed from your credit report, possibly in exchange for a slightly higher payoff amount.

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.

Once you've reached an agreement, get everything in writing. Be sure to include the stipulation about removing the negative data from your credit report and that your entire debt be retired in exchange for the settled upon amount. Use either a cashier's check or money order to issue payment (they won't take your check!). If your only alternative is to use cash, be sure to get a receipt. Plan to retain all related documents at least four years.

Collection agencies have strong motivation to get your money and get it quick. This gives you some useful leverage when negotiating a debt settlement. Making use of your bargaining power can enable you to negotiate a better settlement and start you on the road to cleaning up your credit report.