How overdue credit card debt is bought and sold

Dear Bankruptcy Adviser,
Can credit card debt that is sold to collection agencies still accrue 24 percent interest? Can I get this rate lowered? What are my options?
— Michael

Dear Michael,
I have bad news, worse news and a little silver lining.

The bad news is, yes, collection agencies will almost assuredly be charging you the maximum rate allowed in your state. The worse news is that your interest rate is the least of your worries — you need to be thinking about how to settle with the collections agency. The silver lining, however, is that once you understand the collections business, you’ll be able to make the best decision possible.

Here’s how the business works: Most people face financial difficulties because of divorce, loss of employment or illness. So let’s assume you’ve gone through one of these unfortunate life events and you could not pay your credit card bills. After a while, the credit card company will sell your debt as part of a “bad-debt portfolio” (aka “charged-off accounts,” a bundle of many debtors’ accounts) to a collections agency or a third-party broker. The agency that eventually tries to collect your debt will have acquired it for about 4 to 7 cents on the dollar. From there, your debt can be sold or resold like any commodity, sometimes even after the statute of limitations has run. Often, people are not aware that a statute of limitations even exists, so they never question the debt’s current validity.

Usually, if a collections agency can collect 20 percent of the money you owe, it comes out on top. Frequently they collect much more. So they’re going to harass you (within legal limits) and offer you settlement deals. For example, they might say, “You owe $5,000 on your credit card, but with accrued interest, it’s $7,000 — and we’ll settle with you for half, or $3,500.” Of course, if they bought the debt for $200, even after you factor in their costs, they’re making decent profits. However, they still want to settle and usually will settle for even less than 50 percent of the current balance.

The absolute worst thing you can do is begin a payment plan and then not finish paying — sometimes the collection agency will not give you credit for paying a penny! The problem is that if you fail to pay and the statute of limitations on the debt has not run then the debt will likely be resold to another agency at an even deeper discount. It’s like going back to square one. This new agency will collect on the remaining balance, which will have grown even more because you failed to settle the debt in full with the previous collections agency.

Therefore, the most important thing is to have a monthly payment you can afford. First, figure out this number — be honest with yourself and determine what you can really pay each month. Then you can either retain a negotiator or call the collections agency and negotiate yourself. You can find good books on the subject at your local library.

Your best-case scenario is to be able to negotiate and pay the collections agency a lump sum. Next best is to have a reasonable monthly payment that you can afford and that will let you pay off your debt. After that, it’s time to start thinking whether bankruptcy is a viable option so you can start fresh.