Settling debts with original creditors differs from settling debts with a collection agency.
If the original creditor still has the debt, they will more than likely be very happy to deal with you. However, you may not get a huge savings as you would with a collection agency.
Original creditors can be less flexible when it comes to debt settlement. You may end up agreeing to a lump sum or partial settlement, workout agreement or a temporary reduction in payment for a few months. Whatever the agreement, always get it in writing. Here are several tips that can help you settle debt with original creditors:
1. Creditors may not settle unless you are 91-179 days in arrears
Creditors have access to your credit report and can see how you pay all of your bills. If you are current on most of your obligations, they may be less likely to negotiate a settlement.
Creditors have little incentive to settle a credit card debt when a debtor has just missed one or two payments; or, missed no payments at all. At this point they may suggest a reduction in payment until you are able to catch up.
Once a debtor gets to the 91 day mark the account may be moved to an in-house collections department which means the creditor is likely ready to negotiate a settlement. You do not have to be the best negotiator to settle your debts because you have the best leverage — the money the creditors want.
After the 180 mark, the debt is removed from the books and a charge-off ensues. At the point of charge-off the creditor could transfer or sell the debt to a debt collector for as little as .03 on the dollar.
The optimum time to start negotiating is between the 91-179 day time-frame. The charge-off clock is ticking and the creditor is motivated to make a deal before being forced to write the debt off.
But keep in mind that if you stop paying your bills in an attempt to convince a creditor to settle, your credit scores will suffer. It’s a tough decision if you are trying to preserve a good credit score.
2. Lump sum payment – start Low on your offers
If you are 90-120 days in arrears, a good starting point would be twenty percent (20%) of your total debt if you pay in a lump sum. Twenty percent is a good starting point but expect the creditor to counter offer at a much higher percentage, probably around 85%. Stick to your guns and have a compromise amount in mind that you will be comfortable in accepting.
At a 20% starting point you can probably afford to go another 10% or so to come up with a fair and reasonable offer considering you were probably paying way too much in interest anyway. Request to have penalties and extra interest dropped. Most creditors will do this.
You may have to ask for a supervisor or manager if you are told “no” in response to your offer. Make sure you get a signed settlement agreement or release when you settle for less than the full amount. The release should clearly state the lump sum payment excuses you from any and all remaining balance.
3. Partial repayment over time
If you cannot pay a lump sum, it may be harder to negotiate settlement for less than the amount owed. The creditor may insist you pay100% of the debt if you pay over time. If this is the case request any late payments be deleted from your credit reports. You want to get something out of the deal. Request your credit reports be updated to “paid as agreed” or “never late”.
4. Rehabilitate the debt
If you are past due on a credit card or loan some lenders will allow you to rehabilitate your account. Rehabilitation is a process by which lenders erase negative marks from your credit reports once a series of on-time payments have been made consecutively. Typically lenders require at least 6 to 9 consecutive on-time payments in order for the negative marks to be deleted. Rehabilitation is not something lenders generally offer; you will have to request it.
5. Stick to your bottom line
If your offer to a creditor is low and the creditor counter-offers another amount do not split the difference. Some creditors will propose that you split the difference between their higher demand and your lower offer, do not agree to it. In this instance, take the “split the difference” number as the new top number and offer an amount between that and your original offer.
6. Be patient and determined
In an attempt to settle your debts, creditors may insist that the number they offer is the lowest possible offer and that it is final. Don’t believe them. You can always call back at a later time and get someone totally different who is willing to settle for your desired amount. Remember to always politely ask for a higher authority and be patient.
7. Get your agreements in writing
Original creditors may not want to put negotiations in writing. Insist on any settlement in writing and get a signed release. This is your proof. If you settle for less than the total amount owed, make sure the creditor signs a release stating that your partial payment releases you from any remaining balance.
8. Negotiate a favorable credit rating
Request a “deletion” for an account that you settle in full. If your creditor does not agree to a deletion then request a “paid as agreed” or even “settled” credit rating. Any one of those ratings would be better than “paid charged off”. Also make sure the creditor is settling the entire amount of the debt and not charging off the remaining balance. Get it in writing.
If the creditor will not budge on giving you a favorable rating still negotiate a settlement. You can challenge the listing later directly with the credit bureaus as “paid, never late”. Often you will get a favorable outcome.
9. Watch out for the IRS
Forgiven credit card debt may be considered taxable income by the IRS. When creditors or debt collectors settle debt for less than the amount owed, they are required to file a 1099-C form with the IRS. The 1099-C form should be sent to the debtor as well. Taxpayers must report the forgiven debt income on their tax returns as “other income.”
Depending on the debtor’s income level, the amount forgiven and deductions, the forgiven debt may not significantly affect your taxes but make sure it is reported on your taxes. You don’t want to end up owing the IRS for a settled credit card debt.
