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Paying down old collection accounts

Dear Steve,
About five years ago I had some collection accounts opened up against me. I didn't realize it until recently and have now started the process of paying them off. I was curious how long this will affect my personal credit. Also, some of the companies have offered to let me settle for less than the original amount. Should I take this offer? Thanks!
-- Austin

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Dear Austin,
I don't know how you could have missed five years of collection activity unless you were in a coma, a jail or at the South Pole! But I'll give you the benefit of the doubt that the six months of notices, statements and phone calls, followed by 60 more months of increasingly escalating collection activity, did not reach you. This is an excellent example of why I recommend readers check their credit reports regularly. The collection accounts snuck up on you, and you might have been able to keep the accounts from going to collection if you had known what was on your report.

However, since we can't go back in time, let's move forward. Collections on your credit history are not great. "Paid in full" collections are still negative, but much better than those with a balance. So you are on the right track by paying them off.

The accounts can be legally reported on your credit report for seven years. Under the Fair Credit Reporting Act changes of 1998, the seven-year clock started ticking when you first went 30 days late in the sequence of events that led to the accounts being charged off. So you probably have about a year and a half to go before the items drop off your credit report.

Your question regarding taking a settlement offer is an easy one for me. You owe the money, pay it! But a collector may be willing to take less, for two reasons: First, the longer a debt goes unpaid, the more nervous the creditor becomes. This is because debts, unlike wine, do not improve with age. So a discount for risk makes dollars and sense to a collector. In layman's terms, better to get something now than nothing later. Second, the old accounts may have been sold outright to the collector for pennies on a dollar. In this case, even a steeply discounted repayment could represent a substantial profit to the collector.

Paying less than is owed may be attractive, yes. However, whether you paid your accounts as agreed is one of the factors that go into computing your credit score. So, you might want to consider what is more important, improving/maintaining your score or paying less than is owed on your accounts.

One last thing to consider when deciding on settlement of accounts is that the IRS considers the difference between the amount owed and the amount paid as income. Depending on the size of the debts, the collectors will report to the IRS how much money was forgiven in the settlement and you will be responsible for paying income taxes on that amount. As the saying goes, only two things in life are certain, and one of them is taxes!

Finally, if you end up settling for less than the amount owed, you can try negotiating with the collector to report to the credit bureaus that your account was "paid in full." If the collector agrees to this, make sure you get the agreement in writing before you make the payment.

Good luck!

Steve Bucci, the Debt Adviser, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or ask your debt question here.

-- Posted: April 15, 2005




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