Q: I have creditors who have offered a settlement of my debt, but they will not provide me a written confirmation of their settlement offer. Should I settle my debt with them?
A: Settlement of a debt can be offered as a way to collect on your debts. Generally, the creditor will agree to accept a lesser amount for the debt in an effort to get funds right away. A debt settlement is a variance from your contractual commitment to repay that debt in full, so it is reasonable that you should ask for and receive a written confirmation of the arrangement or have the capability of sending your written understanding of the commitment and have them acknowledge by signing it.
Debt settlement can have some negative impact on your credit score as the debt is not fully repaid and the settlement does not necessarily remove the history from your credit report, so it could impact credit decisions in the future. Some collections agencies may offer to record the payment as being paid in full even though it was settled.
Collections departments often have purchased your debt from another creditor at a huge discount. It is worthwhile for you to have that company validate that you actually owe them the money. You can find a template letter at the Consumer Financial Protection Bureau http://files.consumerfinance.gov/f/201307_cfpb_debt-collection-letter-2_more-information.doc. It would be just terrible to pay someone contacting you only to find out that they don't own the rights to collect on that debt. Someone collecting a debt must be able to prove that this debt belongs to you. If they cannot, then the credit reporting agency can remove this from your credit report.
Paying an agent to settle your debts can be a costly venture and can damage your credit score. At Bank On we encourage personal empowerment to take charge of your financial obligations yourself.
Finally, a word of caution. If a debt is settled, you will likely receive a 1099 at the end of the year for the difference between what you owed and what they received. The settled amount is treated as income - as if they had given you that amount of money.
