Every now and then a new collection agency will take over one of your accounts. And if the account is very old, they might offer to let you “settle” the debt for less than the full amount.
It may even seem like a great deal. You pay 60% or 70% of the debt, and they leave you alone.
You may have encountered this situation so often that you start offering settlements yourself. Or you may have seen advertisements for firms who claim they can help you settle your debt for pennies on the dollar.
But is it a good idea to do it?
As with most things pertaining to the law, the answer is: it depends.
What are your short-term and long-term goals?
First, let’s talk about what you’re trying to accomplish by settling the debt.
If you’re just trying to get the creditor off your back then settlement will certainly accomplish this for you. If you’re afraid of being sued then this can be an effective way to ensure you don’t have to worry about the problem anymore (though it’s not the only way, see below).
But if you’re trying to fix your credit paying a settlement is basically useless. The entry on your credit report will read: “legally settled for less than the full amount.” Loan officers, credit card companies, and other creditors won’t see this as a positive, and your credit score may barely improve, if at all.
Will you be able to handle all your debts at once?
Settling a single debt won’t really help your overall situation.
If you’ve had a big windfall then settling debts so you can keep more of that windfall while still getting out of debt makes a lot of sense. Especially if you don’t anticipate needing or wanting to apply for a loan any time soon.
But if you can’t settle all of them you’re just throwing good money after bad. You’ll barely impact your overall financial picture. You’ll still be struggling month after month, and you’d have paid money that could have gone to necessities, or towards taking steps which could really get you out of debt for good.
Can you afford to pay?
This is closely related to asking yourself whether you can pay all your debts at once. But it bears reiterating.
Do not forego grocery or medicine or mortgage money to pay some creditor just because they offer you a good “deal.” Remember, by the time any debt gets to the stage where any party is offering to settle, it is so old that the original creditor has already recouped the loss via tax breaks. Your moral obligation is already at an end if you are worried about any harm you may be perpetuating by walking away from the debt.
But there’s another reason to ask yourself this question.
If you have tons of collection items you can’t afford to pay, even with a reduced settlement, then you’re probably in over your head. Rather than waiting to find yourself buried under even more financial trouble, you might wish to seriously consider filing for bankruptcy instead.
By doing so, you can eliminate your debts, get a clean slate, and put your household on firmer financial footing. The money you pay to do this will actually solve the problem, instead of temporarily appeasing a single creditor.
Not sure if it’s the right move for you? Contact our office for a free consultation to find out.