No one enjoys being hounded by debt collectors. When you have long overdue credit card debt, it can seem like there’s no way out. But there are steps you can take to settle your old debt and get collections agencies off your back for good.
The time to settle credit debt is when your debt has been sold to a collections firm. Most of the time, lenders wait about six months before selling past due debts to collectors.
At this point, debt collectors may be willing to allow you to settle your debt for less than the amount you owe. That’s because they bought your old debt from the original lender for pennies on the dollar. If you pay even a small amount, they will likely make a profit.
1. Prepare to pay up. To prepare to settle an old debt, you have to figure out how much you can afford to pay. Some lenders or debt collections agencies may allow borrowers to set up a payment plan once they agree to settle a debt for a final amount. But if you can afford to make a lump sum payment upfront, that can give you a serious edge during the negotiation process, making it more likely that a company will agree to settle. There is no magical settlement amount, but ideally, we’d recommend saving at least 20% of your unpaid balance.
2. Make your offer. Tell the firm that you are unable to afford to pay the balance in full. Stand firm. Debt collectors have been known to use some pretty nasty tactics to scare consumers into making payments, like threatening arrest or contacting your employer. If they try anything like this, write down notes and submit a complaint to the Consumer Financial Protection Bureau.
3. Negotiate. The lender may turn you down initially. That doesn’t mean they have given up completely. Try calling again in a couple of weeks and making the same offer. Tell them you are able to pay a certain amount in a lump sum.
4. Get everything in writing. Once they accept your settlement offer, do not make a payment until they agree to send you the offer in writing. Credit reporting bureaus will need this document in order to update the negative account status on your credit history. Also, you will need this document as proof just in case there is a future mistake and another firm tries to sue you for the unpaid debt. It happens. Make sure the settlement offer includes the following details: How long you have to pay the settlement; the name of the debt collections agency; account information for the debt you are settling; confirmation that the settlement will be reported to credit bureaus.
5. Pay by cashier’s check or money order. Avoid cash because it is not traceable and don’t use personal checks because that will give the collection agency your account and routing numbers. Use a cashier’s check or money order (and get a receipt). Then mail the payment via certified mail with a return receipt requested. You could also set up a one-time use checking account with no overdraft fees just to make this payment. Learn more about how to safely make a payment to a collections agency without getting ripped off here.
6. Watch out for taxes. When you settle any kind of debt, you may owe taxes on the forgiven balance. Before you settle, ask the lender or collections agency if you will owe state or federal taxes. If so, they will have to send you a 1099 tax form in the mail, which you’ll file with your annual taxes.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.
