Debt collectors will often offer debt settlement programs to consumers to coerce them to pay a debt. Although settlement offers may sound like a good deal, consumers should stay informed to protect their credit scores and their wallets.
What Is Debt Settlement and Why Do Collection Agencies Offer Settlement Programs?
When a collection agency or debt collector offers a consumer a debt settlement, they are giving the individual an opportunity to pay less than he owes on the debt, which will then be considered paid. Since collection agencies purchase debts for pennies on the dollar, they can afford to offer settlement programs for much less than the amount owed on the original debt and still make a profit.
Misconceptions About Choosing to Settle a Debt
Many people choose to settle a debt because of the damage a negative trade line does to their credit reports. Unfortunately, settling a debt does not remove the negative trade line unless the collection agency agrees in writing that the negative trade line will be removed when payment is received.
In addition, by settling a debt an individual is conducting activity on the collection account. Old negatives that have sat untouched for long periods damage a credit score less over time. Bringing one of those negative trade lines to the forefront by negotiating a debt settlement will cause an immediate drop in credit score.
A settled debt will appear on a consumer’s credit file as “settled” rather than “paid.” Future lenders will see this as evidence that the individual in question cannot be depended upon to pay his or her debts.
Collection Agencies Can Sell a Bad Debt After the Debt Settlement
Unless a debt settlement agreement is made in writing and strictly prohibits the sale of the remaining balance, a collection agency may legally sell the amount of the debt that was not paid through debt settlement to another collection agency.
Individuals should never feel pushed into settling a bad debt merely to end harassment from debt collectors. Debt collector harassment is illegal but a balance that is not paid in full can easily be passed among numerous collection agencies. These collection agencies will demand that the debt be paid- even if it was previously settled with another company.
The Statute of Limitations and Debt Settlement
The statute of limitations is the amount of time that a debt is legally enforceable and varies by state. If the statute of limitations on the debt has expired, or if the consumer has previously sent a dispute letter to a debt collector that has gone unanswered, paying a debt settlement may be unnecessary. A collection agency may not legally file a lawsuit on a debt that has not been validated after a consumer disputes the debt. If a lawsuit is filed, an expired statute of limitations on the debt is a solid defense in every state and will result in the lawsuit being dropped.
Making a payment on an old debt, however, will reset the statute of limitations in every state. Thus if a consumer begins making payments on a debt settlement agreement and stops the payments before the settlement is complete, the consumer may then face a lawsuit for the remainder of the debt- even if the original debt was no longer within the statute of limitations.
The statute of limitations is not to be confused with the reporting period of a debt. This is a mandate by the Fair Credit Reporting Act that dictates how long a debt may appear on a consumer’s credit file.
Consumers Should Settle a Debt to Prevent a Lawsuit
In certain cases, it is in the best interests of the consumer to settle a debt and allow the debt to report as current rather than risk a lawsuit. The risk of a lawsuit is higher if:
- The amount of the bad debt is more than $1000
- The bad debt is still within the statute of limitations
- The collection agency has turned the debt over to a legitimate attorney
Even when threatened with a lawsuit, individuals should take care to remember that many collection agencies threaten lawsuits but compared to the amount that threaten to sue, very few actually follow through. A consumer can always negotiate the terms of his debt settlement agreement even when threatened with a lawsuit.