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Striking a deal with a debt collector

A debt collector is calling and you finally have a little money to offer.

Before you pay a cent, try negotiating a better deal. By offering a lump-sum payment, you could easily cut your debt in half.

Can't swing a big payout? Insist on a monthly payment that won't strain your budget or take money away from more vital expenses such as food, utilities and rent.

"If you can pay off your debt, you should," says John LeBlanc of the Canadian Financial Wellness Group, in Dartmouth, N.S., which empowers consumers to deal with financial stress and debt management.

"But paying a debt in full may put you at more risk, so don't do it if you can't afford it."

So, bargain with collectors-don't let them convince you their debt is your most important priority.

Exert power

Believe it or not, you do have some leverage here. Debt collectors want your money because they're paid a commission on however much they collect. And they don't get a cent until you give it to them.

"The first call will always be the hit for payment in full," explains LeBlanc. "It's meant to create a sense of urgency. Seventy to 80 percent of people are enticed by collectors out of fear and don't realize the consequences."

But if you hold firm, LeBlanc says collectors eager to earn their keep will move quickly down the payment hierarchy.

Although payment in full is at the top of the hierarchy, if you make it clear that isn't a possibility, they'll move down to lump-sum payments and smaller monthly payments until they find some common ground.

Step one in negotiating with a debt collector is to know your rights. Debt collectors will say all kinds of things to upset you and pressure you into agreeing to payment terms you can't afford. Don't be intimidated-you have the law on your side.

Each province and territory has legislation to protect consumers from harassing or abusive debt collectors. While they differ somewhat from place to place, the basics are the same.

There's a long list of rules third-party debt collectors must follow when collecting a debt.

"They must write to you first, they can't call you out of the blue," says lawyer Stanley J. Kershman, author of "Put Your Debt on a Diet: A Step-by-Step Guide to Financial Fitness" and head of the bankruptcy and restructuring group at Perley-Roberston, Hill & McDougall in Ottawa.

"They can't swear at you, and they can't threaten you with violence, repossession or jail time. They also can't be harassing in tone or in calling frequency," says Kershman.

In most places, Kershman says collectors must make their calls between 7 a.m. and 9 p.m., and can't make calls on Sunday or on statutory holidays.

Nor can they call your boss except to verify your employment and wage. And the only time they can call friends or family (unless they were co-signers or guarantors of the debt in question) is to verify your address and phone number.

While some collectors will threaten you with legal action, Kershman says this is unlikely. Third-party collectors need permission from your creditor to undertake any legal action. And given the expenses involved, it's not something creditors are often willing to do, despite what a collector might tell you.

For a summary of provincial or territorial debt collection rules where you live, check out the Canadian Consumer Information Gateway, and do a search on "debt collectors," which will bring up links to the appropriate legislation across the country. Or, contact your ministry of consumer affairs.

Glean fact from fiction

"You have to know what's the truth and what's not the truth so they don't frighten you into a settlement you can't afford," says John Ventura, author of the e-book "Stop Debt Collectors Cold."

For example, even if a debt collector could garnish your wages, first they would need to get a judgment against you in court.

"Debt collectors will say, 'If you don't pay this tomorrow, it will come out of next Friday's pay cheque,'" says Gerri Detweiler, author of The Ultimate Credit Handbook. "They can't do that. But they say it."

Once you know the absolute worst that can happen to you if you fail to pay a debt collector, it's time to take a close look at your finances.

How much can you realistically afford to pay toward an overdue debt? Providing necessities for your family should be your top priority. All other bills are of lesser importance, regardless of what a creditor or debt collector may say. These 16 rules will help you prioritize your bills and expenses.

Once you know how much money you can afford to give to a debt collector, it's time to start negotiating.

Offering a single lump sum payment is a great way to go. Debt collectors want your money as soon as possible, and they may be willing to settle your debt for a whole lot less if you agree to one big payment.

"Collectors are driven by commission. They won't keep their jobs if they don't make money, so they'll farm offers out to save money," says LeBlanc. "It's a common approach [to settle for less] because it's easier to get it and move on."

Some debt collectors will offer to settle if you pay 40 to 60 percent of the amount due. LeBlanc says large creditors, such as banks, will often give collectors blanket permission to settle accounts, while others require collectors to request authorization for each deal they want to make.

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At some of the big banks, for example, LeBlanc says collectors would have permission to settle for 65 percent of the principal and interest owing on debts less than $5,000. More expensive debts would have to be settled for no less than 80 to 85 percent.

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