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Debt Settlement Tutorial

Settling with Debt Collectors

Once six months has passed from the date of your first missed payment, the original creditor will likely write off the debt (that is, as long as you didn't do something silly like make a partial payment).

When a debt is written off, it is either assigned or sold. If a debt is sold, the original creditor no longer has an interest in that debt; the debt collector who purchased the debt now owns it. If the debt is assigned, the original creditor has contracted with a debt collector or collections attorney to try to collect the debt on the original creditor's behalf. In that case, they still have a "say" in the account, since they still own it.

Either way, you will still be contacted by a debt collector:

  • If the debt was assigned, the original creditor is still the owner of the debt. In this case, you probably will not be able to negotiate a great deal, but you might do better than you would if you negotiated at month five or six before the account was written off. Why? The older the debt becomes the less chance there is of recovering any money at all. They know it and now you know it. Start at 10% of the amount of the debt, and work your way up from there.
  • If the debt was sold, the debt collector has purchased the debt for 10 to 15 cents on the dollar—the debt collector has more to gain and a lot less to lose. If you agree to pay 50% of the balance as a settlement, they could make a 500% profit on their investment... not bad.

The key is to determine whether the debt was assigned or sold. When you respond to the dunning letter asking for verification and validation is the time to find this out.

No matter what, never admit responsibility for the debt. If you don't understand why, read through the Debt Relief section of this website. Always talk about settling in theoretical terms. For example, you could say, "I do not know whether this debt is mine or not. But I might decide to settle on this alleged debt just to make the whole issue go away; I can offer 10% of what you claim I owe."

And never make a partial payment. Making a partial payment is an admission of responsibility, resets the statute of limitations on the debt, and creates a contract where none existed before.

Ask for a few provisions before you finalize the agreement:

  1. Require a signed contract from the debt collector (or original creditor if the debt was assigned) stating the terms of the settlement, the amount, and that the account will be satisfied and no further collection activities are allowed.
  2. Include a "paid as agreed" provision. If the debt was assigned, the original creditor still owns the debt and can report the fact that the account was "paid as agreed" to the credit bureaus. If the assignee has put a negative entry on your report, ask them to remove the tradeline entirely. If the debt was sold, the debt collector should be able to update or remove their own negative entry, but probably can't make the original creditor do anything to update your report. It doesn't hurt to ask, though.

Again, refer to the Resource Library for an example of a settlement letter.

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