Do I need to get it in writing when paying off collections accounts?
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.
…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 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.