Negotiating With Debt Collectors

Ensure that you owe the debt claimed by the creditor is legitimate and accurate

When debt collectors contact you, they must give you certain information about the debt they say you owe or they should provide it within five days of first communicating with you. Generally, debt collectors must provide this information in writing, either in the mail or electronically.

This validation information can help you figure out if you owe the debt and will provide information on how to dispute it if you don't. If you're unsure who you owe money to or how much you owe, you can request the debt collector provide more information about the debt by sending a debt validation letter. 

Ensure the debt is within the statute of limitations

Make sure the debt is still legally enforceable, making sure it has not aged out of the legal timeline for collection. 

Once you confirm that you owe a debt, you can pay in full or propose a repayment plan to the debt collector. If you want to make a proposal to repay the debt, here are some questions you should ask yourself: 

How much can I realistically afford to pay each month?

Review your current financial obligations. Write down your monthly take-home pay and your monthly expenses, including the amount you want to repay each month. Try to allow some income left over to cover unexpected costs and emergencies. Remember that falling behind on other bills, even if you're paying off this debt, could cause you more problems. If you're struggling, a non-profit credit counselor can help you create a budget and work with the collectors. 

What amount am I willing to pay to settle the entire debt? 

This could be one payment or a series of smaller payments. Don’t pay more than you can afford. If you have more than one debt with a debt collector, you can direct the debt collector to apply your payments to a specific debt. Debt collectors are not allowed to apply a single payment for multiple debts that you’re disputing.

Avoid companies that charge money in advance to settle your debts for you

Dealing with debt settlement companies can be risky. Some debt settlement companies promise more than they can deliver. Certain creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company won’t be able to settle the debt for you anyway.

Explain your plan 

You can send a Debt Settlement Letter to the creditor or debt collector requesting them to take a lowered percentage of the original debt and start negotiations from there. 

When you talk to the debt collector, explain your financial situation. You may have more room to negotiate with a debt collector than you did with the original creditor. It can also help to work through a credit counselor or attorney.

Record your agreement 

Always ensure to get the settlement agreement in writing before making a payment, and make sure the document specifies that the agreed-upon amount fully satisfies the debt​​​​​​.

If you agree to a repayment or settlement plan, get the plan and the debt collector’s promises in writing before you make a payment. Those promises may include stopping collection efforts and ending or forgiving the debt once you have completed the plan.

Know your rights 

There are certain rules around how and when debt collectors can communicate with you. The FDCPA prohibits debt collectors from placing repeated or continuous telephone calls or conversations with the intent to harass, oppress, or abuse you.

If you’re having an issue with debt collection, you can submit a complaint with the CFPB.

A debt settlement plan, where a debtor negotiates to pay less than the total amount owed to resolve their debt, can indeed have tax implications. Please note that specific tax consequences can be complex and may require consultation with a tax professional.

The IRS typically treats canceled debt as income, and thus taxpayers must report it on their tax return. If the debt was canceled in bankruptcy, it might not be considered taxable income. 

Similar to federal tax laws, Louisiana may also consider canceled or forgiven debt as taxable income. 

When your debt is canceled or forgiven, you should receive a Form 1099-C (Cancellation of Debt) from a lender. 

Debt settlement typically involves negotiating with creditors to pay a reduced amount of the total debt owed, often facilitated through a debt settlement company or through direct negotiation. While it might provide relief in terms of reducing the financial burden, it does have implications for your credit health.

Impact on Credit Score

1. Negative Entries:

   • When you settle a debt for less than the amount owed, it generally gets reported to the credit bureaus as "settled" or "account settled for less than the full amount." This is a negative entry that suggests to future creditors that you did not meet your full repayment obligations.

2. Decrease in Credit Score:

   • This negative entry tends to lower your credit score because payment history is a significant factor in its calculation. Settling a debt implies a breach in the original lending agreement, which indicates higher risk to future lenders.

3. Late Payments:

   • Before a debt gets to a settlement stage, there are often multiple late payments, which are also recorded on the credit report and significantly impact the credit score negatively.

4. Charge-Off Status:

   • In many cases, settled accounts have also been charged off by the creditor (written off as a loss). A charge-off is another negative entry on a credit report.

Appearance on Credit Report

• Duration:
  • Negative information, like debt settlements, typically remains on your credit report for a specific period. In the U.S., for instance, a settled debt can stay on your credit report for up to seven years.
• Future Lending Implications:
  • When future lenders review your credit report, they'll see the settlement, which could impact their decision on whether to extend credit, the amount, and on what terms. A history of debt settlement might signal that you represent a higher lending risk.
• Renting or Employment Consequences:
  • A lower credit score and negative entries on your credit report might not only impact future lending but also affect your ability to rent a home or even have implications in employment opportunities in some cases.