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I have a credit card in collections with a balance of $1972. I will be able to pay this off in a couple of weeks. I have read a lot of articles that say that I can negotiate to have the balance reduced by 40 to 60%.

Sometimes, this credit card company puts a no negotiation hold on their collection account. Besides, negotiation would not say "Paid in Full" and I need my credit report to clearly state that I have PAID IT OFF.

Some websites say that we should get it in writing that they agreed to "close" the account for the negotiated amount. Their reasoning is that the credit card company could just take your money and say "You never paid us anything". If that is the reason, they could very well do it with a full payment as well, can't they?

If I plan to pay the collection account off COMPLETELY ($1972), should I still get it in writing that I agreed to pay it off? What would be the contents of this letter?

Thanks.

  • Any reason you don't want to try negotiating a lower payoff amount? Sure, they might refuse, or they might accept half of what you owe. You can still have it show in your credit report as paid in full if that's what you get them to agree to. – Kat Sep 27 '18 at 16:51
  • @Kat I am trying to apply for a mortgage after this and I talked to the loan officer to see what she suggests. She advised I try to pay it in full if it is possible. I want to make sure my score is high enough for me to get a good rate. Besides, I saw in several places that they will report what I did not pay to IRS as income? Not trying to deal with all that. I might still ask them, very passively. One other reason is, FicoForums has a lot of posts about how this particular company is VERY strict with negotiations. Rejected offers apparently restart the clock and hurt my score more? so... – Crazy Cucumber Sep 27 '18 at 17:32
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    Your credit score will be just as good if you get them to agree to report it as fully paid. The clock restarts only when you admit responsibility for the debt. It's possible to make an offer to pay a debt without that happening. They might not go for it, but it doesn't hurt to ask. And why would you insist on paying money just because you might have to pay a percentage of that money as taxes if you don't? You still come out ahead after paying the taxes. You might benefit from asking another question about negotiating a lower payoff amount while avoiding the potential problems you've described. – Kat Sep 27 '18 at 17:46
  • @Kat True, I will try to negotiate a bit and see if they will come down. Thank you – Crazy Cucumber Sep 27 '18 at 17:48
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The suggestion for obtaining a letter before payment is when you negotiate to pay a lower amount than what you owe. For example, the lender is currently claiming that you owe $1972. Let's say that you talked with the collections agent over the phone and he agreed that you would pay $1000 and that would satisfy the debt in full. You would want that agreement in writing before you sent the $1000, because if you didn't have that, he could very easily take your $1000 and then claim that you still owe $972.

However, if you are planning on paying off the balance in full without negotiating a discount, you don't need any special letter. But let me ask you this: How do you know that your balance is $1972? Do you have a written statement showing this amount, or is this simply the amount that the collections agent told you over the phone? You should get the amount you owe in writing before sending the payment, because if you don't, you might find that the next time you talk to the collections agent, he might have a different number to tell you. Debt collectors don't always tell the truth.

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    The $1972 is the number reported on my credit report. Can I go with that number and safely assume that it is in fact the amount I owe? – Crazy Cucumber Sep 27 '18 at 14:11
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    @CrazyCucumber I would not simply go with the number on the credit report. The amount on the credit report gets updated at most once a month, and this debt is probably still accruing interest charges. The number might be a month old. You should get a current payoff amount in writing if you don't want any surprises. You said that you are a couple of weeks away from having the money anyway, so request the payoff amount now in writing, and by the time the letter comes, you'll have the money to pay it off. – Ben Miller - Reinstate Monica Sep 27 '18 at 14:15
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    @CrazyCucumber Ben is right on the money with this answer. Do you have a time frame to clear this debt? Because when you call they may not be willing to negotiate and may tack on more silly fees and want you to pay more. You will have to be tough with them. Make sure you use either a disposable debit card (one that you never use again), or send them a money order/cashier's check. If you give them access to your account they will rip you off. – Pete B. Sep 27 '18 at 14:34
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    @PeteB. I just read (literally 10 seconds ago) on a different money.SE question to use a disposable credit card! That is such a smart idea. I might do either that or I might just send in a money order. And I would like to have this paid off within a week after I get my money in place. So calling them now and asking them to send me the balance would definitely be a very wise thing to do. Thank you for that. – Crazy Cucumber Sep 27 '18 at 14:38
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    For reference: I've actually had a collector try collect a debt like 5 years after i'd settled it for 50%. I hadn't gotten it in writing, and without documentation, could easily have lost a lawsuit if one ever came. (I still dared them to sue. But i was probably only saved by the fact that $200 isn't worth that much trouble.) – cHao Sep 27 '18 at 18:01
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...so someone can't come along later and say you didn't pay it

That's why you get it in writing. That is especially important when things have gone to (or are about to go to) a third party collection agency. Old debts get traded around all the time, and it's absolutely possible for your old settled debt to pop up with another collection agency. You want to have a letter to fax them, or to wave around in court. Send them copies, obviously.

It's also important if you are brokering a bargain other than "just paying them in full". Because you may need to hold their feet to the fire to keep their side of the deal. In my experience, if you settle for a fraction, it is very hard to get them to say on your credit report that you paid in full. They will report a weird code word that sounds sorta like "paid in full" but is actually a dogwhistle to industry insiders that you settled.

Settling for a fraction isn't as valuable as you think

Because they will issue you a 1099-C for the forgiven part of your debt, and you will have to pay taxes on that money you were "gifted".

There are exceptions, but you have to fight for them by filing a Form 982 to counter the 1099-C.

So you'll get bit for, say, 25% of the forgiven debt on the Federal side, and maybe 8% on the state side, varying wildly by your income and state. It still beats paying it in full, but not by as much as you'd hoped -- and then, you get slammed with this big lump-sum extra tax, because no withholding is done.

If the amount is large and your financial stars misalign, You might even need to prepay it in a quarterly estimated tax payment, or face penalties for under-withholding. You are expected to know when this applies.

Given all the tomfoolery and monkeyshines associated with IRS effects, I am cautious of negotiated settlements. Better (emotionaly, not financially) to pay it in full then tell the IRS "can't touch this!"

  • The reasons you've listed here along with a few of my own personal reasons are why I'd rather pay it in full and never have to think about it again. Thank you for the details though, I couldn't find the links I read all this in and was trying to remember what forms they were that I'd have to fill! – Crazy Cucumber Sep 28 '18 at 12:30

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