Dear Debt Adviser,
If collection agencies are calling me and I settle with them on an agreed price and terms, can the original party that I owed the debt to come after me? Or once settled, is that debt no longer "alive"?
Before I answer your question, let me ask one of my own. Why do you want to settle the debt instead of paying it in full? America is increasingly becoming a society in which anything you can get away with is an acceptable alternative to actually meeting your obligations. I may be old fashioned or I may be ahead of my time -- often the two are the same -- but if you owe the money, why not pay it?
Here are some good reasons I think you should: Your credit report and score will suffer less if you pay in full. The chance of this bill reappearing in a year or two with a new collector will be eliminated. You will not owe the IRS money on the settled debt. You will have kept your word, even when it may have been difficult to do so.
I know these considerations may not have the value they did some years ago, but Harvey, the times they are a-changing. Remember those people who were first considered victims of subprime home loans? Now many are being looked at as greedy, irresponsible co-conspirators in the housing meltdown.
Now if you just don't have the money to pay the debt and you have a mess of other debts and collectors nipping at your heels, let me suggest you try a credit counseling agency. They may be able to get all your creditors and collectors to accept what you can afford as part of a structured deal called a debt management plan. This way you may still be able to pay in full.
But if all of the above doesn't do it for you and you must settle for less than you owe, here's my suggestion on how to do it right. Have the collection agency send you a verification of debt to confirm that the debt you are negotiating is yours, that is, one you owe. The original creditor will not be allowed to collect on the same debt. You will, however, need to keep copies of everything and keep good records of phone calls. Why? Because there are collectors out there who may try to collect the same debt twice, either in error or on purpose.
Get the settlement offer in writing before signing or agreeing to any terms. Be sure that you can realistically afford the one-time settlement payment or monthly payments in the agreement. Be sure you send it in on the due date and use certified mail with a return receipt requested. Expect that you will receive a 1099-C form from the collector that will list the amount forgiven as income. The form provides you with the same information sent to the IRS for tax purposes.
In a month or two, review your credit reports with all three major bureaus to make sure that your paid debt does not appear on your credit report. Repeat this annually. If it should reappear, send a dispute into the credit bureau that reported it and send in copies of your documentation. Keep in mind that the item on your credit report from the original creditor and the item from the collector will remain on your credit report for seven years from the date of original delinquency.
Sometimes a debt gets passed around like an hors d'oeuvre at a party for collectors as if it were not paid, when in fact it has been paid. Should you be in the unfortunate position of being contacted by another collector after the debt is paid, try to stay calm, send in the documentation that the debt is paid and report any companies that continue to harass you to the Federal Trade Commission.
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