Editorial Policy

Am I safe from collectors after a debt settlement?

Erica Sandberg

September 17, 2013

QDear Erica,

Once you settle a debt in writing with a collector, can anyone come back for the balance, or will the debt be finalized and settled? — Ellen

AHi Ellen,

I understand your concern. Communicating with collection agencies can feel like swimming with a school of peckish sharks. You're never quite sure that you're doing everything right, or if you'll be bitten in half if you don't.Ask Erica

So can a collector come after you for the balance that's left over after arranging a settlement? The answer is no, if you do it correctly.

Here's how to safely settle a debt.

First, find out what the statute of limitations for debt collections is in your state. If your debt is older than your state's statute of limitations, you can't be sued for it. However, it will continue to be listed on your credit reports for seven years from the day of the first delinquency. If you can't be sued, you're in a better position to make an offer and have it accepted by the debt collector. Because they can't take you to court and force you to pay, the worst thing they can do is continue to list the debt on your credit report. Hence, it behooves them to take what they can get and be done with it.

If the statute of limitations has not been reached, be careful when promising to pay, whether with a settlement or in installments. Collection agencies want you to give them the entire amount due, and if they think you have more money and are just trying to be cheap (and if the debt is quite large), it may prompt them to drag you into court.

When discussing a settlement with collectors, be clear about what you are willing to pay. Though you may begin to bargain with them, never promise more than you can afford, and never agree to pay before you're ready to send a lump sum.

For example, let's say the debt is $2,000. You offer to pay $1,000. The collector may then tell you that they'll accept no less than $1,500, but after hashing it out, the two of you finally agree to $1,200 to settle the debt. Great!

Now write a letter summarizing the agreement:

–  You will pay the negotiated amount.

–  You'll send it by a specific date.

–  The amount you pay is a settlement.

–  You will no longer owe any money after your check is cashed.

–  The collection agency will update your credit report with a notice of the settlement and an explanation that no more money is due.

Trust me, you've got to be almost ridiculously clear with these things. Request a letter back that reiterates all the terms, which forms a contract. When you get it, send the check (a money order is preferable). Keep all the paperwork in a safe place, in case you're ever contacted again about the debt in the future.

Wait at least 30 days, then pull your credit report. The account should indicate that it's been settled. At that point, there is no way the collector can legally come after you for another red cent.

If you didn't do all the above and instead just had a little chat with the collector instead of getting things in writing, it's possible that you opened the door to them demanding the entire balance due.

It is important to know that even if the settlement offer goes off without a hitch, you may be hit with a higher-than-expected tax bill. A forgiven sum over $600 is considered income, so you may receive a 1099-C form at tax time showing that forgiven amount, which you are required by law to declare as income. Also, your credit report will still show that the account went to collections and that you did not pay the obligation in full — which doesn't look spectacular on your credit report or when factored into a credit score.

Got a question for Erica? Send her an email.