If you're behind – way behind – on a debt, so much so that the collection agency has stopped calling, you've actually stumbled into a better position from which to negotiate, because a silent telephone means that the creditor is no longer very optimistic about getting paid. So when you do choose to negotiate, it's a good idea to do so with the collection agency in person and face-to-face. Most are not set up to do this, and are likely to be more flexible when sitting across the desk from you than talking over the phone.

However, if you're forced to negotiate by phone, be sure to take comprehensive notes, including the date and time of the call and the full name and title of the person with whom you're speaking. You can also conduct the entire negotiation process in writing, if you prefer. If you do, keep copies of all correspondence, and be sure to send your letters certified with a return receipt. And naturally, you'll want to deal directly with a person who has the authority to make a settlement decision. There's no point in pleading your case to someone, only to have to do it all over again for his or her supervisor.

But why would creditors ever agree to negotiate on money owed them in the first place? It would seem that they'd demand all that was due them, wouldn't it? Well, put yourself in their shoes for a moment. If someone owed you a big chunk of money, your first inclination would probably also be to recoup the entire loan amount. But consider carefully – are there any conditions under which you would ever settle for less than the full balance? You might, if you thought that it was the only way you were going to get any of your money back. You also might consider it if you thought the person who owed you didn't have anything of any value that he or she (or you) could sell to raise the money.

Your creditors think the same way. If they believe that there's no point in taking you to court and getting a judgment against you because you don't have any assets anyway, they're more likely to be open to some type of settlement. Furthermore, if they believe that you only have a small amount of cash, and you're either going to give it to them or one of your other creditors who's more inclined to negotiate a settlement, then they too may become a bit more amiable to the idea.

Typically, the best deal that you can expect to get from a creditor or a collection agency is a fifty-percent settlement; i.e., you pay 50 cents on the dollar. But if your account has gone to a second or even a third collection agency, there's a much lower expectation that you will actually ever make good on the debt. In that case, you may be able to negotiate a settlement as low as 33 cents on the dollar. The longer a debt has lingered, the more likely creditors will be to settle. And the less eager you appear, the more you strengthen your negotiating position. That's why it's not wise to accept the first settlement offer a creditor sends you, and you probably don't want to accept the second offer, either.

When negotiating, ask to have penalties and extra accrued interest dropped. Most creditors will do this, as long as they believe there's a chance that they'll recoup at least part of the original debt. Also, if the statute of limitations will be expiring soon on your debt (yes, there is a statute of limitations for the collection of most debts, and it varies by state), be sure to mention that as well. It can tip the scales in your favor. And don't volunteer any information. For instance, if the collector learns that you need to clear up your debt in order to qualify for a loan to buy a home, then you'll have virtually no chance of reaching a settlement that's advantageous to you.

Some experts suggest that you threaten bankruptcy. If the particular debt is one that would be discharged under bankruptcy protection, then the creditor may be willing to settle; since, again, getting something now is better than getting nothing later. However, you must be careful when using this tactic. If you run up more debt on an account after you threaten bankruptcy, you may wind up unable to discharge that particular debt.

In addition to negotiating a dollar amount for the settlement, you should also use the negotiation to manage the effects on your credit report as much as possible. Ideally, you'd like to have two things done: you need the collection agency to remove its listing from your credit report entirely; and you want the original creditor to report your account as "Paid as Agreed," or "Account Closed/Paid as Agreed." At the very least, you want any derogatory remarks taken off your report, and you want the account to be listed as "Paid in Full," even if you negotiated a reduced settlement. Ask for these things when you offer to settle, and be sure to get the collector's response in writing.

A worst-case scenario could be something like this: you might agree to have the original creditor show the account as "Settled," as long as any negative comments, such as "Charge-off or "Collection" are removed. ("Settled" is not the best way to have an account listed on your credit report, however. It could trigger a denial of credit down the road.) Then, once your account has been paid, you might be able to have the entire entry removed from your credit by using the credit reporting agency's dispute process.

Before you leave the collection agency's office (or end the call, if negotiating by phone), get a copy of everything that you've agreed upon in writing. If you're negotiating by phone, have a fax number ready before you call, so that you can get the agreement faxed over to you immediately.

Once you have the agreement, you'll need to pay the settlement amount quickly. Usually, you can either return with the funds or overnight the money to the collector. But do not give the company a personal check. You don't want the collector – and potentially any other creditors that you may owe – to get access to your bank account number. Pay off the settlement with a cashier's check or money order, but do not purchase it at your own bank. And be sure to keep a copy of check or order; you'll want to have proof that the debt was paid.

Finally, if you've negotiated a. settlement for less than the full amount that you owed, be sure to make a special notation on the check – something along these line: "Cashing this check constitutes payment in full on account number xx-xxxxx-xx." In most states, creditors cannot pursue you for any additional amounts if they've cashed a check with this type of annotation.

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