How to settle with a collection agency?

It sounds like trying to settle your debt would be a good thing to try. Debt settlement is simply negotiating with a creditor to take less than the full amount of a debt as payment in full. Creditors will often do this if they can be persuaded that due to the debtor's financial position, this is all they're going to get—half a loaf being better than no loaf. Note, though, that settlement is voluntary on the part of creditors—they do not have to settle for less than what they are owed. You need to show them that settling is in their interest, by making the settlement offer a good one under the circumstances.

You make your offer stronger by showing your financial hardship—why you can't afford to pay the whole debt—and having all (or at least most) of you offer available as a lump sum payment. To invoke another cliché, since "a bird in the hand is worth two in the bush," if you can offer the creditor 60 %, say, of the money now, rather than making them wait and fight to try to get 100%, you make settlement much more attractive.

Collections agencies can be settled with the same way that the original creditor could be settled with: you contact them and propose your offer. If you are uncomfortable doing this yourself, you could retain an attorney to negotiate on your behalf.

Note that there is a law, called the Fair Debt Collections Practices Act (FDCPA) which limits how collections agencies can contact you or try to collect. (It doesn't limit the original creditor—just a third-party collections agency.) Among other things, they can't call you at work if you tell them not to. So not only can you try to work out some reasonable settlement, but you can prevent them from harassing you while you do so.