Lawsuit Avoidance

• Your original creditor might have wanted to be rid of your account and take its tax benefit for the charge-off, but the collection agency wants the money from you. Agencies buy bad accounts for a fraction of what the debtors owe and profit by collecting more than they paid. Their tactics include lawsuits for bills that are within state statutes of limitations, according to Pulliam Weston, so you may need to settle to avoid being sued. Otherwise you may have a court judgment entered against you.
  
  

Credit Repair

• Your original delinquent bill and charge-off mars your credit report, and the addition of a collection account makes it even worse. Debt collectors sometimes agree to remove the entry from your Experian, Equifax and TransUnion reports in exchange for settling the bill, according to Bankrate.com columnist Steve Bucci. Your settlement should still be below the original amount owed because the collection agency paid very little for the debt. Demand a written agreement spelling out the amount that will be counted as payment in full and the collector's obligation to erase the account from your credit files before making your payment.
  
  

Mortgage Applications

• Mortgage lenders are picky about your credit score and the items in your credit files. Unpaid collection accounts hurt your ability to qualify for a home loan, particularly if they are less than two years old, according to the Mortgage Reference Library. Negotiate your settlement with the collection agency prior to filling out mortgage applications. Aim to get the entry completely erased from your credit reports. Paying off older collection accounts hurts your credit score, the Mortgage Reference Library explains, because it adds current activity to the account. The bad debt disappears from your reports in seven years, even if you never settle it.
  
  

Warning

• Never make settlement arrangements or send a payment to a collection agency on a bill that is past your state's statute of limitations. Bankrate.com writer Marcie Geffner warns that negotiating and sending any money, even a very small payment, starts the legal collection period over again. The firm then regains right to pursue you legally, including through a lawsuit.