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How to settle debt with original creditors

how to settle credit card debt

how to settle credit card debtSettling 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.

Settle Debts with Collection Agencies

8 thoughts on “How to settle debt with original creditors”

  1. Lisa, I’m not sure you can advise on this issue or not but here it goes. I lost my job temporarily about 3 years ago so my wife and I had to make several decisions regarding our debt responsibilities. We decided to contact a debt counseling service to help with our concerns and money issues. As of today we have paid over $40,000 towards our debt in the last 20 months with help of the debt counseling service. All of our creditors agreed to participate in a negotiated monthly payment program through the debt counseling service which we have maintained in good faith for 20 months. Here’s the problem…My wife’s Macy’s credit card account was charged off the same month we started making the new monthly payments. The account had a balance of about $2100 when it was charged off. We have made 20 payments towards that account and reducing the balance to under $800. We had recently tried o refinace on our home when we found out about the inquiry on my wife’s credit report regarding the Macy’s charge-off. We have tried numerous times to try and talk to someone with Macy’s with no success. How do we deal with the charge-off inquiry and is there anyway to get it removed from her credit report since we have been in good faith since the charge-off was reported.? BTW, we never received any information about the charge-off after reported in November 2009.

    Thank you,

  2. Wow thank you so much! Well before I read your reply I called this creditor back and I explained to them my hardships past, current, and future concerning this balance and my school loans, the fear of garnished wages, etc. They actually sounded somewhat reasonable and agreed to help somewhat but because they were no longer taking care of my actual payments i would have to call the counseling agency to drop me from their program, then call them back and make a settlement arrangement. The agent told me to call back once I’ve dropped myself from the other and that they would honor a _% off my balance but reminded me that by doing so anything over $600 in settlement charges knock off goes towards taxable income and that would be reported and I would need to claim that amount next year. She also said that it shows on my credit score history as a settlement payment which could take 7yrs to drop off the report. I feel like I have no choice but to do so
    if I want to stop making these monthly payments and true while it will show as a settled account if I don’t do it then I still risk having it on my account for the next few years and I’d like to establish credit cards again for renting cars, making future online reservations, or having for emergencies. She also said that I could ideally cancel the credit counseling and just come back to them and make continued payments at a low interest rate but not as low as before. Now that I know I have a chance to settle, should I still try or risk paying back the agency way or re-enlist the account and pay the card’s way? Thanks for all your advice!

    1. Congratulations, it sounds like you have negotiated several settlement options you can live with. As I stated previously I would not advise using savings toward paying off a debt in this current economy, especially if the interest rate is low on the debt. But since you feel you have no choice I strongly urge you to do what you think is best. The best of luck to you.

  3. I have one bad credit left on my credit report. It has been “frozen” and I can not find the creditor. How do I go about finding them? They are listed on my report as “Resolution Management”..but has no contact number?? I want to settle, but it’s hard when you can’t find the company. What do you suggest?

    1. That is very interesting. Since the creditor is a furnisher of information to your credit report they should have contact information listed. “Resolution Management” sounds like a collection agency. You may want to simply dispute the matter and see if it drops off. Sometimes collection agencies go out of business and cease updating the entries they put on your credit report. Another option would be to contact the credit reporting agency and request the contact information.

  4. On the subject of “partial payment over time”, should I also ask for this agreement in writing or should I follow through in good faith? It seems a creditor might be leary of putting in writing an agrrement to delete late payments from report and update it to reflect “paid as areed” and “never late”.

    1. Yes, get whatever agreement you settle on in writing. They should not mind sending you a simple one-page letter outlining the terms of an agreement. The “paid as agreed” or “never late” credit ratings would be contingent upon you keeping the agreement and making the payments. You will not know what the creditor may agree to unless you ask. You are making a good faith effort to bring an account current or even pay it off so do not hesitate to negotiate a better credit rating for yourself.

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